The Taylor Mountain Uranium Company currently has annual revenues of $1.2 million and annual expenses exclusive of

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Question:

The Taylor Mountain Uranium Company currently has annual revenues of $1.2 million and annual expenses exclusive of depreciation of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15 years). The firm’s marginal tax rate is 40 percent.

A new high-speed processing unit costing $1.2 million is being considered as a potential investment designed to increase the firm’s output capacity. This new piece of equipment will have an estimated usable life of 10 years and a $0 estimated salvage value. If the processing unit is bought, Taylor’s annual revenues are expected to increase to $1.6 million, and annual expenses exclusive of depreciation will increase to $900,000. Annual depreciation will increase to $320,000. Assume that no increase in net working capital will be required as a result of this project. (Note: This problem is the same as problem 7 in Chapter 9, except for the following questions.)

a. Calculate the processing unit’s net present value, using a 12 percent required return.

b. Should Taylor accept the project?

c. How many internal rates of return does the processing unit project have? Why?

d. Calculate the processing unit’s internal rate of return.

Reference: Problem 7:

The Taylor Mountain Uranium Company currently has annual cash revenues of $1.2 million and annual cash expenses of $700,000. Depreciation amounts to $200,000 per year. These figures are expected to remain constant for the foreseeable future (at least 15 years). The firm’s marginal tax rate is 40 percent. A new high-speed processing unit costing $1.2 million is being considered as a potential investment designed to increase the firm’s output capacity. This new piece of equipment will have an estimated usable life of 10 years and a $0 estimated salvage value. If the processing unit is bought, Taylor’s annual revenues are expected to increase to $1.6 million and annual expenses (exclusive of depreciation) will increase to $900,000. Annual depreciation will increase to $320,000. Assume that no increase in net working capital will be required as a result of this project. Compute the project’s annual net cash flows for the next 10 years, assuming that the new processing unit is purchased. Also compute the net investment (NINV) for this project.