(Consider using an Excel Spreadsheet to solve this problem.) Blueberry Farms Inc
ID: 2616244 • Letter: #
Question
(Consider using an Excel Spreadsheet to solve this problem.) Blueberry Farms Inc. is considering a four-year project to grow new and higher-quality blueberries. An initial investment of $20 million depreciable straight-line to zero over the project's life will buy the equipment necessary to get the project off the ground. The net working capital will also require an initial investment of $2.2 million to support the planting inventory; this cost is fully recoverable whenever the project ends. In the company's opinion, the project can generate pre-tax cash revenues of $19 million against the pre-tax cash operating costs of $6.2 million on an annual basis. The market value of the used equipment over the life of the project is as follows. At the End of Year 2 4 Market Value (S million $13.5 $11.7 $10.5 50.0 Consider the following: An income tax rate of 35% An appropriate discount rate of 15% All types of income are taxed at the same tax rate .If applicable, consider terminal loss or recapture based on salvage value a. If the company operates the project for four vears what is the NPV of the project? [6 points] b. If the company operates the project for: [9 points] a. b. c. the first vear only, what is the NPV of the project? the first two years only, what is the NPV of the project? the first three vears only, what is the NPV of the project? c. What economic life of the project maximizes its value to the company? If it is not four years then relative to operating the project for four years, what is the value of the option to abandon it after the value-maximizing economic life? [5 points]Explanation / Answer
Soln : a) Here we have shown the cash flows with taxes taken at 35% and discount rate aas 1/1.15^year
Please consider we have taken 2.2 as salvage value, since it is recoverable at the end of the project.
b) -c We are considering when it is sold at t = 3 years, the salvage value = Market value - remaining value of equioment + 2.2 for all the cases.
b)- b For 2 years :
b) -a For 1 year , if sold at :
c) We can see from the above NPV values at different timings, it is highest when sold after 4 years i.e. $7.81 million
Year 0 1 2 3 4 Initial investment 20 NWC 2.2 Revenues 19 19 19 19 Operating Cost 6.2 6.2 6.2 6.2 Depreciation 5 5 5 5 Net profit 7.8 7.8 7.8 7.8 Tax@35% 2.73 2.73 2.73 2.73 Net income after tax 5.07 5.07 5.07 5.07 Add depreciation 5 5 5 5 Cash flow from operations 10.07 10.07 10.07 10.07 Salvage Value 2.20 Net Cash flows -22.20 10.07 10.07 10.07 12.27 Discount factor at 15% 1 0.8696 0.7561 0.6575 0.5718 PV of CF -22.2 8.76 7.61 6.62 7.02 NPV 7.81Related Questions
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