TEV Inc., is considering an expansion project. The project requires an initial fixed asset investment of...

 

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TEV Inc., is considering an expansion project. The project requires an initial fixed asset investment of $3.9 million. The fixed asset will be depreciated straight-line to zero over its three-year life, after which time it will be worthless. The project also requires an initial investment in net working capital of $360,000. The firm has already paid a consulting firm $80,000 to determine the viability of the project. The project is estimated to generate $3,250,000 in annual sales, with costs of $1,500,000. The tax rate is 20 percent and the required return is 12 percent. a. Determine the OCF for the expansion project. (3 marks) b. What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (8 marks) c. What is the project's NPV? Should the project be accepted? Explain. (3 marks) TEV Inc., is considering an expansion project. The project requires an initial fixed asset investment of $3.9 million. The fixed asset will be depreciated straight-line to zero over its three-year life, after which time it will be worthless. The project also requires an initial investment in net working capital of $360,000. The firm has already paid a consulting firm $80,000 to determine the viability of the project. The project is estimated to generate $3,250,000 in annual sales, with costs of $1,500,000. The tax rate is 20 percent and the required return is 12 percent. a. Determine the OCF for the expansion project. (3 marks) b. What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (8 marks) c. What is the project's NPV? Should the project be accepted? Explain. (3 marks)

Answer rating: 100% (QA)

a The Operating Cash Flow OCF can be calculated using the following formula OCF S C D1 T D Where S i... View the full answer