Corporation X produces pens. The corporation is deciding whether to build a new plant, for an...

 

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Corporation X produces pens. The corporation is deciding whether to build a new plant, for an initial investment of $100,000. The corporation projects to receive cashflows of $10,000 a year for 8 years by selling the output of the plant. Moreover, in year 9 the corporation could decide to convert the plant to produce a new product. The conversion would cost $8,000, and the new product would be sold for the following 40 years, with expected cash inflows per year of $30,000. The required rate of return for investments in pen production is 10% per year, while the one for investments in the production of new products is 15% per year. Say that you must commit to your decisions today. What would you do today and in year 9? How much value can be generated by the plant? (5 points) At the end of the economic life of a machine, the salvage value is $1,500 while the book value is $800. Suppose that the marginal tax rate is 40%, what is the after-tax salvage value? (5 points) Johnson Inc. is considering a new four-year expansion project that requires an initial fixed asset investment of $2.5 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which it will be worthless. The project is estimated to generate $2 million in annual sales, with costs of $800,000. a) If the tax rate is 35 percent, what is the OCF for this project? (3 points) b) Suppose the required return on the project is 13 percent. What is the project's NPV? (2 points) Corporation X produces pens. The corporation is deciding whether to build a new plant, for an initial investment of $100,000. The corporation projects to receive cashflows of $10,000 a year for 8 years by selling the output of the plant. Moreover, in year 9 the corporation could decide to convert the plant to produce a new product. The conversion would cost $8,000, and the new product would be sold for the following 40 years, with expected cash inflows per year of $30,000. The required rate of return for investments in pen production is 10% per year, while the one for investments in the production of new products is 15% per year. Say that you must commit to your decisions today. What would you do today and in year 9? How much value can be generated by the plant? (5 points) At the end of the economic life of a machine, the salvage value is $1,500 while the book value is $800. Suppose that the marginal tax rate is 40%, what is the after-tax salvage value? (5 points) Johnson Inc. is considering a new four-year expansion project that requires an initial fixed asset investment of $2.5 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which it will be worthless. The project is estimated to generate $2 million in annual sales, with costs of $800,000. a) If the tax rate is 35 percent, what is the OCF for this project? (3 points) b) Suppose the required return on the project is 13 percent. What is the project's NPV? (2 points)

Answer rating: 100% (QA)

a To calculate the Operating Cash Flow OCF for the project we can use the following formula OCF EBIT ... View the full answer