1. Temporary Housing Services Incorporated (THSI) is considering a project that
ID: 2630671 • Letter: 1
Question
1. Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5.63 million to setup and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%.
Assume that THSI's cost of capital is 8.1% p.a.
Compute the NPV of the temporary housing facility to the nearest dollar.
(Do not enter a dollar sign. please enter your answer as a whole number (no cents). if the value is negative, please include a negative sign.)
_____________
2. Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected to increase revenue by $12,000 each year for six years. The equipment will increase costs $4,000 each year for six years. It costs $32,000 to purchase today and for tax purposes must be depreciated down to zero over its 8 year useful life using the straight-line method. If Tank is actually forecasting a salvage (for capital budgeting purposes) of $5,000 after 6 years, what is the machine's net cash flow (after tax) for year 6? Assume the tax rate is 30%.
a. 12,400
b. 11,800
c. 13,000
d. 12,700
a. 12,400
b. 11,800
c. 13,000
d. 12,700
Explanation / Answer
Investment 5.63 mil
Cash Flow:
20.0 - 12.0 = 8.0 less 35% tax = 5.2 + 1.05 (35% tax saved on 3.0 deprc) = 6.25
PV of 6.25 (R 12%) = 5.58
NPV: 5.63 - 5.58 = .05, or 50,000 Positive
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