Lakeland is considering an expansion project. To date they have spent $75,000 in
ID: 2660102 • Letter: L
Question
Lakeland is considering an expansion project. To date they have spent $75,000 investigating the viability of the project and have decided to proceed. The proposed project will cost $450,000 in addition to the $75,000 that was spent on the feasibility study. The project will be depreciated over a 3 year MACRS class life. Lakeland would use the 3-year MACRS method to depreciate the machine and equipment which are 33% 45%, 15% and 7%.
If the project is undertaken Lakeland will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. The company will realize an additional $600,000 in sales over each of the next four years. The company
Lakeland is considering an expansion project. To date they have spent $75,000 investigating the viability of the project and have decided to proceed. The proposed project will cost $450,000 in addition to the $75,000 that was spent on the feasibility study. The project will be depreciated over a 3 year MACRS class life. Lakeland would use the 3-year MACRS method to depreciate the machine and equipment which are 33% 45%, 15% and 7%.
If the project is undertaken Lakeland will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. The company will realize an additional $600,000 in sales over each of the next four years. The company
Explanation / Answer
YEARS.
Depreciation rate
DEPRECIATION
CASHFLOWS = (SALES-OPERATING EXPENSES-DEPRECIATION)*(1-T) + DEPRECIATION
DISCOUNTING FACTOR @ 9.5%
P.V. @ 9.5%
0
= COST OF PROJECT + INCREASE IN WORKING CAPITAL
= 450000 + (50000-10000)
= 490000
(490000)
1
33%
148500
=(600000-400000-148500)*0.6 + 148500
=179400
0.9132
179400*0.9132
=163828.08
2
45%
202500
=(600000-400000-202500)*0.6 + 202500
=201000
0.8340
=167634
3
15%
67500
= (600000-400000-67500)*0.6 + 67500 + RECOVRY OF WORKING CAPITAL + NET SALES PROCEDS FROM SALVAGE VALUE OF THE PROJECT
=147000 + 40000 + 42600
=229600
0.7617
= 174886.32
4
7%
31500
NPV =
16348.40
SALES PROCEDS FROM SALVAGE VALUE OF THE PROJECT
PROFIT ON SALE = SALE VALUE
YEARS.
Depreciation rate
DEPRECIATION
CASHFLOWS = (SALES-OPERATING EXPENSES-DEPRECIATION)*(1-T) + DEPRECIATION
DISCOUNTING FACTOR @ 9.5%
P.V. @ 9.5%
0
= COST OF PROJECT + INCREASE IN WORKING CAPITAL
= 450000 + (50000-10000)
= 490000
(490000)
1
33%
148500
=(600000-400000-148500)*0.6 + 148500
=179400
0.9132
179400*0.9132
=163828.08
2
45%
202500
=(600000-400000-202500)*0.6 + 202500
=201000
0.8340
=167634
3
15%
67500
= (600000-400000-67500)*0.6 + 67500 + RECOVRY OF WORKING CAPITAL + NET SALES PROCEDS FROM SALVAGE VALUE OF THE PROJECT
=147000 + 40000 + 42600
=229600
0.7617
= 174886.32
4
7%
31500
NPV =
16348.40
SALES PROCEDS FROM SALVAGE VALUE OF THE PROJECT
PROFIT ON SALE = SALE VALUE
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