3. The FCIu for a small expansion to an existing facility is M$20. The expansion

Question

3. The FCIu for a small expansion to an existing facility is M$20. The expansion was completely built by the end of year 0 and operating immediately thereafter. Other estimated costs of the process are listed below (M$- millions of dollars): Working Capital, WC MS4 (at the end of year 0) COMa = M$7.57 Revenue from sales, R M$10 Tax rate, t = 40% and discount rate, leff = 12% Depreciate with a 9.5 year IRS class life (5 year GDS) Lifetime of the project 10 years after start-up, and start up at the beginning of year 1 Salvage value, S, at the end of the project life is assumed zero (8 pts) What is the present value for the annual cash flow after tax for end of year 1 assuming the GDS (MACRS) is used for depreciation? Please report to the nearest thousand dollars a. GoS b. (8 pts) What is present value for the annual cash flow after tax for end of year 6 assuming the GDS repor to the neare (MACRS) is used for depreciation? Please report to the nearest thousand dollars. (8 pts) What is present value for the annual cash flow after tax for end of year 6 if the ADS (straight line) is used for depreciation? Be careful about the years you need to depreciate over. Please report to the nearest thousand dollars. c.

Explanation / Answer

Answer A

In the year 1 the Present value (PV) of cash inflow is $8.06 million and if calculated from the initial time than the NPV for the first 6 years cash flows is $-23.51 million.

Answer B-

In the year 6 the Present value (PV) of cash inflow is $3.04 million and if calculated from the initial time than the NPV for the first 6 years cash flows is $-4.2 million.

Answer C

In the year 6 the Present value (PV) of cash inflow is $3.2 million and if calculated from the initial time than the NPV for the first 6 years cash flows is $-5.59 million.

Rate of Depreciation (R) = 1 – [s/c]1/n 1.00000 Year only Where, 1-(0/7.57)*1/5 s = scrap value at the end of period ‘n’; c = Written down value at present; and n = useful life of the assets

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