Question: Fracking, Inc. is considering a replacement project. The required return is 10% and the tax rate is 30%. If the firm purchases the new equipment,
Fracking, Inc. is considering a replacement project. The required return is 10% and the tax rate is 30%. If the firm purchases the new equipment, net working capital will have to be increased by $100,000 immediately.
| New Equipment | Old Equipment | ||
| Current book value | $400,000 | ||
| Acquisition Cost | $800,000 | Current market value | $500,000 |
| Life | 5 years | Remaining life | 5 years |
| Annual sales | $400,000 | Annual sales | $400,000 |
| Cash oper. Expenses | $150,000 | Cash Oper. Expenses | $260,000 |
| Annual Depreciation | $160,000 | Annual Depreciation | $80,000 |
| Acctg. Salvage Value | $0 | Acctg. Salvage Value | $0 |
| Expected Salvage Val. | $200,000 | Expected Salvage Val. | $0 |
9. The net initial outlay for the proposed Fracking project would be closest to A.$430,000 B.$500,000 C.$530,000 D.$560,000 10. The net change in after-tax operating cash flow for year 1 for the proposed Fracking project would be closest to A.$88,000 B.$93,000 C.$98,000 D.$101,000 11. The terminal year after-tax TOTAL cash flow for the proposed Fracking project would be closest to A.$325,000 B.$341,000 C.$372,000 D.$394,000 12. Based on the information provided, Fracking should
A.Reject the project because the NPV is negative
B.Accept the project because the NPV is between $0 and $5,000 C.Accept the project because the NPV is between $5,001 and $15,000 D.Accept the project because the NPV is greater than $15,000
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
Study Help