0.06 1.00 te is 40 percent, and its corporate co of hospital\'s tax rate is perc

Question

0.06 1.00 te is 40 percent, and its corporate co of hospital's tax rate is percent, ne net cash lows over its five-yeat eximased is Io imate the project's 10 percent. following format as a guide.) life. (Hint: Use the cost of capital 0 nt cost s0o00 maintenance costs costs Utilities costs supplies Incremental overhead Depreciation perating income Net operating income Equipment salvage value pw000 cash flow Mas Depreciation b. What are the project's NPV and IRR (Assume for now that the project has average risk.) 8 You have been asked by the president and CEO of Kidd Pharma- ceuticals to evaluate the proposed acquisition of a new labeling ma- chine for one of the firm's production lines. The machine's pric is $50,000, and it would cost another $10,000 for transportation and

Explanation / Answer

1. net investment outlay at year 0 = $50,000+$10,000 = $60,000

2. Projects operating cash flows for 3 years :

= $60,000*0.33*0.40

=$7,920

= $60,000*0.45*0.40

= $10,800

= $60,000*0.15*0.40

= $3,600

3. terminal cash flow at the end of year 3 (post tax) = inflow - taxes = $20000 -{ [$20000 - ($60,000*0.07*)]*40%}

= $20,000 - $6,320 = $13,680

4. Average risk means that we use corporate cost of capital as our discount rate,, thus 10%

if the NPV is positive, the project would be considered as profitable.

NPV of The Project

= $60,000*0.33*0.40

=$7,920

= $60,000*0.45*0.40

= $10,800

= $60,000*0.15*0.40

= $3,600

=$18,846

[Hence its Profitable]

Year Cost savings (A) Depreciation tax shield (B) Total cost savings each year = (A+B) 1 $20,000

= $60,000*0.33*0.40

=$7,920

= $27,920 2 $20,000

= $60,000*0.45*0.40

= $10,800

= $30,800 3 $20,000

= $60,000*0.15*0.40

= $3,600

= $23,600

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