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  3. option shows the estimated increase in gross profi

option shows the estimated increase in gross profit from the improved facility and/or automation at...

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Question

Accounting

option shows the estimated increase in gross profit from the improved facility and/or automation at current forecast production levels. All information is Pre-Tax. Tax rate = 40%

Option A:

  • Cost (time = 0) = $10.0 million, and takes one year to complete and bring online.
  • Yr. 1 cash flow = 0.
  • Depreciate the project cost over the 5yr allowable write-down of the facility after completion (Yr. 2-6).
  • The production line will increase pre-tax revenue by $5.0 million per year starting in yr. 2 and going for five years (Yr. 2-6).
  • The WACC for the firm is 10% and the project risk premium is 4.0%

Termination Value: Six years from today the project is salvaged for $2.0 Million of before tax dollars.

What is the NPV of Option A, answer in dollars?

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