9. CAD Corporation is considering some new equipment whose data are shown below. The equipment has...
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9. CAD Corporation is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, additional inventories would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. The details are as follows: WACC 10.0% Net investment in fixed assets (depreciable basis) $70,000 Required inventories $30,000 Straight-line depreciation rate 33.333% Annual sales revenues $75,000 Annual operating costs (excl. depreciation) $30,000 Expected pre-tax salvage value $2,000 Tax rate 35.0% a. Calculate the project's NPV and decide whether the equipment should be purchased or not (15 marks) b. Suppose the company will incur additional $10,000 interest expense each year on the money borrowed for the project. Explain in words how this will change your answer to (a)? (5 marks) 9. CAD Corporation is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, additional inventories would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. The details are as follows: WACC 10.0% Net investment in fixed assets (depreciable basis) $70,000 Required inventories $30,000 Straight-line depreciation rate 33.333% Annual sales revenues $75,000 Annual operating costs (excl. depreciation) $30,000 Expected pre-tax salvage value $2,000 Tax rate 35.0% a. Calculate the project's NPV and decide whether the equipment should be purchased or not (15 marks) b. Suppose the company will incur additional $10,000 interest expense each year on the money borrowed for the project. Explain in words how this will change your answer to (a)? (5 marks)
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a The projects NPV is calculated as follows Year 0 Net investment in fixed assets depreciable basis ... View the full answer
Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
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