Here is the information you have about the potential project: This is a 4-year project i.e. you
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Here is the information you have about the potential project: This is a 4-year project i.e. you will keep the machine for 4 years. Only the items listed below change. Other income statement and balance sheet items remain constant i.e. they do not change so they are not relevant for your calculations.
Cash flow information – you will use this information to estimate the project’s cash flows
- Gross Fixed Assets or Property, Plant, & Equipment (gross) on the balance sheet will increase by 10%. This will be a cash outlay in Year 0 – in other words, this is the purchase price of the asset.
- Method 1: Assume the asset is depreciable on a MACRS 5-year life. Notice that although you are keeping the machine for 4 years, it has a MACRS class life of 5 years.
- Method 2: Assume that the asset is eligible for bonus depreciation in Year 1. In other words, 100% of the asset cost can be depreciated in Year 1
- Net working capital (NWC) will increase by 10% of the increase in Gross Fixed Assets in Year 0. This same amount will be recovered at the end of year 4. NOTE: DO NOT USE CURRENT ASSETS MINUS CURRENT LIABILITIES TO CALCULATE NWC.
- Revenue on the income statement will increase by 5% from FY 2019. This will be your Year 1 revenue increase i.e. you need to use the INCREMENTAL revenue. Inflation will cause revenue to increase by 2% in Years 2, 3, and 4.
- Cost of Revenue on the income statement will increase by 3% from FY 2019 i.e. you need to use the INCREMENTAL Cost of Revenue. This will be your Year 1 cost of revenue increase. (Please note that if your company does not have Cost of Revenue you should use Operating Expenses.) Inflation will cause the costs to increase by 2% in Years 2, 3, and 4.
- The tax rate is 21%. If calculated taxes are negative, you should assume the full value of the tax credit is recognized that year i.e. the tax credit will reduce the loss in the same year.
- The asset will be disposed of at the end of Year 4 at which time the salvage value will be 5% of the original purchase price.
- Gross Fixed Assets or Property, Plant, & Equipment (gross) on the balance sheet will increase by 10%. This will be a cash outlay in Year 0 – in other words, this is the purchase price of the asset.
- Use Excel to create a professional-looking spreadsheet with appropriate cash flows, depreciation table, NPV and IRR Indicate your recommendation about whether the project is acceptable under either MACRS depreciation and/or bonus depreciation. You should also indicate which approach yields the highest NPV.
Property Plant, & Equipment (Gross)/ Fixed Gross Assets | $42,939.00 |
Revenue | $ 108,203.00 |
Cost of Revenue | $ 71,043.00 |
WACC | 9.30% |
Related Book For
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson
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