Consider the following project of Hand Clapper, Inc. The company is considering a four-year project to...

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Consider the following project of Hand Clapper, Inc. The companyis considering a four-year project to manufacture clap-commandgarage door openers. This project requires an initial investment of$12.8 million that will be depreciated straight-line to zero overthe project’s life. An initial investment in net working capital of$560,000 is required to support spare parts inventory; this cost isfully recoverable whenever the project ends. The company believesit can generate $10.3 million in pretax revenues with $3.8 millionin total pretax operating costs. The tax rate is 25 percent and thediscount rate is 9 percent. The market value of the equipment overthe life of the project is as follows:

Year Market Value (millions)
1 $ 10.2
2 8.3
3 4.5
4 1.2

a.
Assuming the company operates this project for four years, whatis the NPV? (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
b-1. Compute the project NPV assuming the project is abandoned afterone year. (Do not round intermediate calculations and enteryour answer in dollars, not millions, rounded to 2 decimal places,e.g., 1,234,567.89.)
b-2. Compute the project NPV assuming the project is abandoned aftertwo years. (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
b-3. Compute the project NPV assuming the project is abandoned afterthree years. (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)

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a NPV at the end of year 4 605971111 Formula Year n 0 1 2 3 4 Initial investment II 12800000 Revenue R 10300000 10300000 10300000 10300000 II4 Depreciation D 3200000 3200000 3200000 3200000 Cost C 3800000 3800000 3800000 3800000 RDC EBIT 3300000 3300000 3300000 3300000 25EBIT Tax 25 825000 825000 825000 825000 EBIT Tax Net income NI 2475000 2475000 2475000 2475000 Add depreciation 3200000 3200000 3200000 3200000 NI D Operating Cash Flow OCF 5675000 5675000 5675000 5675000 NWC 560000 560000 MV1Tax where MV value at end of year 4 After tax salvage value SV 900000 See Answer

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Transcribed Image Text

Consider the following project of Hand Clapper, Inc. The companyis considering a four-year project to manufacture clap-commandgarage door openers. This project requires an initial investment of$12.8 million that will be depreciated straight-line to zero overthe project’s life. An initial investment in net working capital of$560,000 is required to support spare parts inventory; this cost isfully recoverable whenever the project ends. The company believesit can generate $10.3 million in pretax revenues with $3.8 millionin total pretax operating costs. The tax rate is 25 percent and thediscount rate is 9 percent. The market value of the equipment overthe life of the project is as follows: YearMarket Value (millions)1$10.2 28.3 34.5 41.2 a.Assuming the company operates this project for four years, whatis the NPV? (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)b-1.Compute the project NPV assuming the project is abandoned afterone year. (Do not round intermediate calculations and enteryour answer in dollars, not millions, rounded to 2 decimal places,e.g., 1,234,567.89.)b-2.Compute the project NPV assuming the project is abandoned aftertwo years. (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)b-3.Compute the project NPV assuming the project is abandoned afterthree years. (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)

a.	Assuming the company operates this project for four years, whatis the NPV? (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
b-1.	Compute the project NPV assuming the project is abandoned afterone year. (Do not round intermediate calculations and enteryour answer in dollars, not millions, rounded to 2 decimal places,e.g., 1,234,567.89.)
b-2.	Compute the project NPV assuming the project is abandoned aftertwo years. (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
b-3.	Compute the project NPV assuming the project is abandoned afterthree years. (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.)