Countywide Financing is fed up with collections. They are considering the establishment of a new division to
Question:
Countywide Financing is fed up with collections. They are considering the establishment of a new division to handle all collections for the firm. Compensation to the new division will be based on the successful collection(s) of outstanding delinquent debt(s).
The following table reflects the new divisions expected revenue:
The projected life expectancy of this venture is seven (7) years. Revenue receipts are expected to shrink at the rate of 8% per year across the board.
Countywide will utilize existing space available in their current headquarters. This space costs them $3.00 per square foot per month and consists of 1800 square feet. Rent is expected to increase at the rate of 2% per year for as long as Countywide remains at this location. Other operating expenses (excluding depreciation) add up to $300,000 for the first year with an expected annual growth rate of 9% per year. Countywide will invest $825,000 in net working capital for the new division and spend $425,000 on new computers and office equipment. The new equipment will cost $15,000 to install. The equipment will be depreciated over five (5) years using the MACRS table (see irs.gov). At the end of the seven(7) year life expectancy of the division, the salvage value of the equipment will be $10,000. The marginal tax rate is expected to be 37% over the life of the project and the average tax rate is expected to be 35% over the life of the project. Countywide expects a minimum return of 12% from this division.
Determine the following and show your work where appropriate:
a. Net investment required to establish Countrywide?s new division.
b. Calculate the annual net cash flows over the life of the project.
c. Calculate the NPV of this project and determine if it is a viable venture.
d. Calculate the payback period and justify whether it is acceptable and why.
Bank Management and Financial Services
ISBN: 978-0078034671
9th edition
Authors: Peter Rose, Sylvia Hudgins