Langley Co is considering two projects that will each cost $1,500,000 initially and both projects will last
Question:
Langley Co is considering two projects that will each cost $1,500,000 initially and both projects will last 5 years: Project A This project will require $125,000 of initial working capital, and will generate $420,000 cash inflows per year for the 5 years, at the end of which time it will be scrapped with no residual value. The working capital will also be released at the end of the 5-year period to be used for other new projects. Project B In addition to the original investment, Project B will need $125,000 in Year 3 in order to maintain the equipment at peak capacity, and will generate $450,000 in annual cash inflows. It will be scrapped and sold as salvage for $75,000 in its final year. The after-tax discount rate is 8%. CCA rate 20% Tax rate 30%
Required:
1) Use net present values to determine the more acceptable of the two projects.
2) Determine the internal rate of return of each project: Is it above [ ],
Does the IRR support your recommendation in 1)?
3 ) Explain the tax shield, and why it is important that it be included in this analysis? Would you come to the same conclusion with/without the tax shield calculation?
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston