A company is considering a project that will reduce annual operating expenses by $200,000, before income...

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A company is considering a project that will reduce annualoperating expenses by $200,000, before income taxes each year forthe next five years. The project requires an investment inequipment that costs $1,000,000 and will be depreciated usingstraight line depreciation over its 5-year life. At the end of theproject life, the equipment is expected to be sold for $500,000.The equipment uses a different material and inventory willinitially rise by $100,000 and the inventory can be sold at the endof the project for the same amount it costs. The company’s marginaltax rate applicable to this project is 40%. The company’s requiredreturn on the project is 10%.
a. What is the initial investment required by the project?
b. What is the annual OCF from the project?
c. What is the net after tax salvage value of the machine in thelast year?
d. What is the NPV of the project?
e. At what discount rate would the company accept theproject?

Answer & Explanation Solved by verified expert

4.4 Ratings (921 Votes)

Part 1The initial investment required by the project is calculated asbelowInitial Investment Purchase Cost of Equipment Increase inWorking CapitalHere Purchase Cost of Equipment 1000000 and Increase inWorking Capital 100000Initial Investment 1000000 100000 1100000 or 1100000 as itindicates costPart 2The value of annual operating cash flow from the project isarrived as belowAnnual Operating Cash Flow Reduction See Answer

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