2. operating cash flows and depreciation Aa Aa McDermott Technologies is evaluat

Question

2. operating cash flows and depreciation Aa Aa McDermott Technologies is evaluating a new project that requires $800,000 in new equipment. McDermott estimates that the new project will generate $900,000 in annual sales at the end of each of the next four years and that operating costs (excluding depreciation) will equal $400,000. Suppose the firm depreciates the equipment using the straight-line method over four years and the firm's tax rate is 40%. If the project's WACC is 10.3%, what is the present value of the project's OCFs? $1,215,053.27 O $1,196,767.84 $1,199,352.34 $1,201,946.00 $1,217,702.83 suppose that McDermott uses Modified Accelerated Cost Recovery System (MACRS) depreciation rates instead. The applicable rates are 33%, 45%, 15% and 7%, respectively. Recalculate the firm's OCFs and find their present value now (still assuming a WACC of 10.3%). $1,230,020.52 $1,207,334.66 $1,214,818.65 $1,219,851.03 $1,209,820.77 QNA 3.14 2004-2013 Aplia. All rights reserved. Graded Save & Continue 2013 Cengage Learning except as noted All rights reserved.

Explanation / Answer

Year 1 2 3 4 Sale 900,000 900,000 900,000 900,000 Cost 400,000 400,000 400,000 400,000 Depreciation(Straight line) 200000 200000 200000 200000 PBT(Sales-cost-Dep) 300,000 300,000 300,000 300,000 Tax@40% 120000 120000 120000 120000 PAT 180,000 180,000 180,000 180,000 Cash flow(PAT+Dep) 380,000 380,000 380,000 380,000 P.V@10.3% 344514.96 312343.6 283176.4 256732.9 NPV 1196767.8 Year 1 2 3 4 Sale 900,000 900,000 900,000 900,000 Cost 400,000 400,000 400,000 400,000 Depreciation(MARS) 33.00% 45.00% 15.00% 7.00% Depreciation(MARS) 264000 360000 120000 56000 PBT(Sales-cost-Dep) 236,000 140,000 380,000 444,000 Tax@40% 94400 56000 152000 177600 PAT 141,600 84,000 228,000 266,400 Cash flow(PAT+Dep) 405,600 444,000 348,000 322,400 P.V@10.3% 367724.39 364948.8 259330 217817.6 NPV 1209820.8

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