1 5 . A new project is expected to have an 8 - year economic life. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
A new project is expected to have an year economic life. The project will have an initial cost of
$ Installation and shipping charges for the equipment are estimated at $ The
equipment will be depreciated as a year asset under MACRS rules. A working capital investment of
$ is required to undertake the project. The revenues from the project in year are expected to
be $ These are expected to increase at a compound annual rate of percent. Operating costs
exclusive of depreciation are $ These costs are expected to increase at an percent compound
annual rate. The firms marginal tax rate is percent. The expected salvage value of the equipment at
the end of year is $
a Compute the projects net investment.
b Compute the annual net cash flows for the project.
c If the firms cost of capital is percent, should the project be undertaken?
d The managers of the firm have also decided to evaluate this project using the certainty equivalent
approach. They have established the following certainty equivalent factors for the cash flows forecasted
in each year:
Year alpha
The riskfree rate is percent. Compute the certainty equivalent NPV for this project
Posted Date: