New project NPV Answer: e Diff: M N . Burress Beverages is considering a project where they would open a new facility in Seattle, Washington. The company’s CFO has assembled the following information regarding the proposed project:• It would cost $500,000 today (at t = 0) to construct the new facility. The cost of the facility will be depreciated on a straight-line basis over five years.• If the company opens the facility, it will need to increase its inventory by $100,000 at t = 0. $70,000 of this inventory will be financed with accounts payable.• The CFO has estimated that the project will generate the following amount of revenue over the next three years:Year 1 Revenue = $1.0 millionYear 2 Revenue = $1.2 millionYear 3 Revenue = $1.5 million• Operating costs excluding depreciation equal 70 percent of revenue.• The company plans to abandon the facility after three years. At t = 3, the project’s estimated salvage value will be $200,000. At t = 3, the company will also recover the net operating working capital investment that it made at t = 0.• The project’s cost of capital is 14 percent.• The company’s tax rate is 40 percent.What is the project’s net present value (NPV)?a. $ 69,207b. $178,946c. $286,361d. $170,453e. $224,451 New project NPV Answer: c Diff: M R . Mills Mining is considering an expansion project. The proposed project has the following features:• The project has an initial cost of $500,000. This is also the amount that can be depreciated using the following depreciation schedule: MACRS DepreciationYear Rates 1 0.33 2 0.45 3 0.15 4 0.07• If the project is undertaken, at t = 0 the company will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. This net operating working capital will be recovered at the end of the project’s life (t = 4).• If the project is undertaken, the company will realize an additional $600,000 in sales over each of the next four years (t = 1, 2, 3, and 4). The company’s operating costs (not including depreciation) will equal $400,000 a year.• The company’s tax rate is 40 percent.• At t = 4, the project’s economic life is complete, but it will have a salvage value (before-tax) of $50,000.• The project’s WACC is 10 percent.• The company is very profitable, so any accounting losses on this project can be used to reduce the company’s overall tax burden.What is the project’s net present value (NPV)?a. $11,122.87b. $50,330.14c. $54,676.59d. $68,336.86e. $80,035.52 New project IRR Answer: b Diff: M . As one of its major projects for the year, Steinbeck Depot is considering opening up a new store. The company’s CFO has collected the following information, and is proceeding to evaluate the project.• The building would have an up-front cost (at t = 0) of $14 million. For tax purposes, this cost will be depreciated over seven years using straight-line depreciation.
• The store is expected to remain open for five years. At t = 5, the company plans to sell the store for an estimated pre-tax salvage value of $8 million.
• The project also requires the company to spend $5 million in cash at t = 0 to purchase additional inventory for the store. After purchasing the inventory, the company’s net operating working capital will remain unchanged until t = 5. At t = 5, the company will be able to fully recover this $5 million.
• The store is expected to generate sales revenues of $15 million per year at the end of each of the next five years. Operating costs (excluding depreciation) are expected to be $10 million per year.
• The company’s tax rate is 40 percent.
What is the project’s internal rate of return (IRR)?
a. 15.35%
b. 13.94%
c. 10.64%
d. 12.45%
e. 3.60%
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