Reference no: EM132500362

Question 1: You work as a finance manager for Drill Tech, Inc., a mid-sized manufacturing company located in Minnesota. Which one of these projects will provide the most shareholder value to the company?

Question 2: Other than what is noted in each project scenario, all other costs will remain constant, and you should remember to only evaluate the incremental changes to cash flows.

• The proposed projects for you to review are as follows.

Project A: Major Equipment Purchase

1. A new major equipment purchase, which will cost $10 million; however, it is projected to reduce cost of sales by 5% per year for 8 years.
2. The equipment is projected to be sold for salvage value estimated to be $500,000 at the end of year 8.
3. Being a relatively safe investment, the required rate of return of the project is 8%.
4. The equipment will be depreciated at a MACRS 7-year schedule.
5. Annual sales for year 1 are projected at $20 million and should stay the same per year for 8 years.
6. Before this project, cost of sales has been 60%.
7. The marginal corporate tax rate is presumed to be 25%.