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Expansion of production facility

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Reference no: EM132951341

Energy East Corporation is considering an expansion of their production facility. The financial data is as follows:

  • Investment: $2,500,000
  • 20% debt equity ratio. Loan ($500,000) borrowed at 5% interest rate and repaid in 6 years.
  • Project life: 6 years
  • Salvage value: $150,000 (in actual dollars)
  • Depreciation method: 5-year MACRS
  • Income tax rate: 25%
  • Annual Revenue from Year 1: $800,000 (in constant dollars)
  • Annual O&M cost from Year 1: $400,000 (in constant dollars)
  • Market interest rate or MARR: 12%

Suppose the general inflation rate (affects revenues and O&M) during the next 6 years is expected to be 4% annually.

What is the PW of the project? (Hint: The MARR has been adjusted for inflation, so it can be directly used to calculate PW based on the future cash flows in actual dollars.)

Reference no: EM132951341

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