Dixon Weed Seeds Inc. is considering expanding. An outlay of ?$173 million is required for equipment...

90.2K

Verified Solution

Question

Finance

Dixon Weed Seeds Inc. is considering expanding. An outlay of?$173 million is required for equipment for the? expansion, andadditional net working capital of ?$16 million is required tosupport the expansion. The equipment is expected to have aproductive life of 9 ?years, and will be depreciated over 9 yearsto ?$25.31 million. It is expected to be sold at the end of itslife for ?$20.76 million. Revenues minus expenses are expected tobe ?$37.368 million per year for the life of the equipment. The?corporation's marginal tax rate is 26?% and the cost of capital forthis investment is 9?%. Compute the NPV of? Dixon's proposedexpansion. ? (In $millions with 3? decimals.)

Answer & Explanation Solved by verified expert

4.5 Ratings (686 Votes)

The project has initial capital outlay of 173 million and additional net working capital requirement of 16 million Both of these are initial investments in the project The project life is for 9 years At the end of the 9th year the equipment would be depreciated to 2531 million We are concerned with how this depreciation takes place as depreciation expense is not a cash expense and is not considered in capital budgeting decisions Although the equipments depreciated vlue is 2531 it is expected to be sold at 2076 which will result in loss on sale of equipment This loss would provide a tax shield which needs to be considered while calculating the cash flow Hence we first consider revenue minus expenses loss on sale of equpiment and add them See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Dixon Weed Seeds Inc. is considering expanding. An outlay of?$173 million is required for equipment for the? expansion, andadditional net working capital of ?$16 million is required tosupport the expansion. The equipment is expected to have aproductive life of 9 ?years, and will be depreciated over 9 yearsto ?$25.31 million. It is expected to be sold at the end of itslife for ?$20.76 million. Revenues minus expenses are expected tobe ?$37.368 million per year for the life of the equipment. The?corporation's marginal tax rate is 26?% and the cost of capital forthis investment is 9?%. Compute the NPV of? Dixon's proposedexpansion. ? (In $millions with 3? decimals.)