The Heather Forde Corporation, a firm in the 35% marginal tax bracket with a 15% required rate
Fantastic news! We've Found the answer you've been seeking!
Question:
The Heather Forde Corporation, a firm in the 35% marginal tax bracket with a 15% required rate of return, is considering a new project. This project involves the introduction of a new product. This project is expected to last five years and then, because this is somewhat of a fad project, it will be terminated. The following information pertains to the project:
Cost of new plant and equipment | $6,900,000 |
Installation costs | 100,000 |
Unit sales | |
Year | Units sold |
1 | 80,000 |
2 | 80,000 |
3 | 80,000 |
4 | 120,000 |
5 | 120,000 |
Sales price | $250 per unit |
Variable cost | $130 per unit |
Annual fixed costs | $300,000 |
Working capital | $500,000 |
Depreciation per year | $1,200,000 |
The working capital that is required at the beginning of the project will be recovered at the end of the project. The plant will be sold at the end of the project for $1,000,000.
Required:
- Determine the net cash flows associated with the project [7 marks]
- The project's net present value [8 marks]
- The payback period for the project. [5 marks]
Briefly compare the NPV with the Payback as decision making techniques. [5 marks
Related Book For
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty
Posted Date: