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1. Litchfield Design is evaluating a 3-year project that would involve buying a new piece of equipment for 280,000 dollars today. The equipment would be depreciated straight-line to 40,000 dollars over 2 years. In 3 years, the equipment would be sold for an after-tax cash flow of 52,000 dollars. In each of the 3 years of the project, relevant revenues are expected to be 171,000 dollars and relevant costs are expected to be 93,000 dollars. The tax rate is 50 percent and the cost of capital for the project is 5.61 percent. What is the NPV of the project?
2. What is the NPV of project A? The project would require an initial investment in equipment of 30,000 dollars and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today). Annual operating cash flows of 11,700 dollars per year are expected each year until the project ends in either 3 years or 4 years. In 1 year, the project is expected to have an after-tax terminal value of 26,920 dollars. The cost of capital for this project is 11.29 percent.
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug's profits will be $5 million in its first year and that this amount will grow at a rate of 2% per year for the ne..
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