Reference no: EM132287931
REQUIRED INVESTMENT
Tannen Industries is considering an expansion. The necessary equipment would be purchased for $12 million, and the expansion would require an additional $1 million investment in net operating working capital. The tax rate is 40%.
a. What is the initial investment outlay? Round your answer to the nearest dollar. Write out your answer completely. For example, 13 million should be entered as 13,000,000.
b. The company spent and expensed $10,000 on research related to the project last year. Would this change your answer? Why?
I. No, last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
II. Yes, the cost of research is an incremental cash flow and should be included in the analysis.
III. Yes, but only the tax effect of the research expenses should be included in the analysis.
IV. No, last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
V. No, last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
c. The company plans to use a building that it owns to house the project. The building could be sold for $4 million after taxes and real estate commissions. How would that fact affect your answer?
I. The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible proceeds after taxes and commissions must be charged against the project as a cost.
II. The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible proceeds before taxes and commissions must be charged against the project as a cost.
III. The potential sale of the building represents an externality and therefore should not be charged against the project.
IV. The potential sale of the building represents a real option and therefore should be charged against the project.
V. The potential sale of the building represents a real option and therefore should not be charged against the project.
PROJECT CASH FLOW
Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:
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Sales revenues
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$15 million
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Operating costs (excluding depreciation)
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10.5 million
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Depreciation
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3 million
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Interest expense
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3 million
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The company has a 40% tax rate, and its WACC is 12%.
Write out your answers completely. For example, 13 million should be entered as 13,000,000.
a. What is the project's cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
b. If this project would cannibalize other projects by $1.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.
The firm's project's cash flow would now be $ .
c. Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a? Round your answer to the nearest dollar.
The firm's project's cash flow would by $ .
AFTER TAX SALVAGE VALUE
Karsted Air Services is now in the final year of a project. The equipment originally cost $31 million, of which 75% has been depreciated. Karsted can sell the used equipment today for $7.75 million, and its tax rate is 30%. What is the equipment's after-tax salvage value? Round your answer to the nearest dollar. Write out your answer completely. For example, 13 million should be entered as 13,000,000.
Multiple Choice Problems
Liberty Services is now at the end of the final year of a project. The equipment originally cost $20,000, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
a. $5,040
b. $5,600
c. $6,328
d. $5,712
e. $5,992
Your company, RMU Inc., is considering a new project whose data are shown below. What is the project's Year 1 cash flow?
Sales revenues $21,750
Depreciation $8,000
Other operating costs $12,000
Tax rate 35.0%
a. $9,686
b. $9,960
c. $8,863
d. $8,772
e. $9,138
The production department of Celltronics International wants to explore the relationship between the number of employees who assemble a subassembly and the number of units produced. The dependent variable is production; that is, it is assumed that different levels of production result from a different number of employees. Use data from the file Active Learning Ch 13.xlsx, available in D2L in the folder Week 15, to answer the following questions.
Question 3 (2.5 points)
What is the correlation coefficient?
options:
0.56
0.44
0.67
Question 4
A. Run the regression in Excel. Regress production level (dependent variable) on number of employees (independent variable). What is the slope of the regression line?
Question 4 options:
5.42
1.63
7
5
Active Learning chapter 13. Xls
Assemblers Production
2 15
4 25
1 10
5 40
3 30
TextBook: Analysis of an Expansion Project
Attachment:- Analysis of an Expansion Project.rar