Page l6 SECTION II (Answer one questions in this section -20pt.) 5. A project re
ID: 2787377 • Letter: P
Question
Page l6 SECTION II (Answer one questions in this section -20pt.) 5. A project requires an initial investment of $180,000, has a three-year life and is depreciated straight-line to zero. The firm is in the 35% marginal tax bracket Other projednlevant information are provided below Unit Sale 6,000: Price/unit $80.00, Variable Cost- $60.00, Fixed Coss $80,000 a. Calculate the annual Net Operating Income. (13 pt.) b. If the required retum for the proyect is 8% should the firm undertake it under this scare using the NPV critcrion? (7 pt.)
Explanation / Answer
Project should be rejected as NPV is negative Statement showing Cash flows Particulars Time PVf 8% Amount PV Cash Outflows - 1.00 (180,000.00) (180,000.00) PV of Cash outflows = PVCO (180,000.00) Cash inflows 1.00 0.9259 47,000.00 43,518.52 Cash inflows 2.00 0.8573 47,000.00 40,294.92 Cash inflows 3.00 0.7938 47,000.00 37,310.12 PV of Cash Inflows =PVCI 121,123.56 NPV= PVCI - PVCO (58,876.44) Sales = 6000*80 480,000.00 Less Variable cost= 6000*60 (360,000.00) Contribution 120,000.00 Less fixed costs (80,000.00) Less depreciation= 180,000 (60,000.00) Income (Loss) before tax (20,000.00) Tax at 35% (7,000.00) Income (Loss) after tax or net operating income (13,000.00) Add Depreciation 60,000.00 Cash flow after tax 47,000.00
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