Please solve and explain: After paying $3 million for a feasibility study, Stanley wrote a proposal with...

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Finance

Please solve and explain:
After paying $3 million for a feasibility study, Stanley wrote aproposal with the following cash flow estimates for a 25-yearcapital project. Equipment cost: $34 million, Shipping costs: $1million, Installation: $19 million, Salvage: $4, Working capitalinvestment: $2 million, Revenues are expected to increase by $20million per year and cash operating expenses by $9 million peryear. The firm’s marginal tax rate is 40 percent, its weightedaverage cost of capital is 9%, and the firm requires a 3 yearpayback. Assume conventional straight line depreciation.
Evaluate the project using NPV, IRR, PI, and PB.
Answer:
IO = $56 million
? D = $2.16 million
NCF1-25 = $7.464 million
NCF25 = $4.4 million
NPV = $17.826 million > 0, so Accept
IRR = 12.71% > 9%, so Accept
PI = 1.32 > 1, so Accept
PB = 7.50 years > 3 so Reject
ACCEPT the project; PB can lead to wrong decisions

Answer & Explanation Solved by verified expert

4.3 Ratings (823 Votes)

We calculate the Cash flows as underYearInitial costSalvage after taxSalvage1taxNetrevenue after tax Revenuecost1taxTaxshielddepreciationTaxWorking capitalNet Cash flowCumulative See Answer

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Please solve and explain:After paying $3 million for a feasibility study, Stanley wrote aproposal with the following cash flow estimates for a 25-yearcapital project. Equipment cost: $34 million, Shipping costs: $1million, Installation: $19 million, Salvage: $4, Working capitalinvestment: $2 million, Revenues are expected to increase by $20million per year and cash operating expenses by $9 million peryear. The firm’s marginal tax rate is 40 percent, its weightedaverage cost of capital is 9%, and the firm requires a 3 yearpayback. Assume conventional straight line depreciation.Evaluate the project using NPV, IRR, PI, and PB.Answer:IO = $56 million? D = $2.16 millionNCF1-25 = $7.464 millionNCF25 = $4.4 millionNPV = $17.826 million > 0, so AcceptIRR = 12.71% > 9%, so AcceptPI = 1.32 > 1, so AcceptPB = 7.50 years > 3 so RejectACCEPT the project; PB can lead to wrong decisions