70.2K

Verified Solution

Link Copied!

Put the timetable here in an organized way, and put the six incremental cash flows on the bottom of the table.

Then, compute the NPV using the given discount rate.

You are the CFO of a semiconductor company. Your firm is considering expanding its plant and you have been asked to evaluate the expansion. You have been given the following information: * The project is expected to last 5 years with or without the expansion (until \\( t=5 \\) ). * Revenues and costs always occur at the end of the year. You have received the following revenue and cost projections (all figures in millions of dollars). * The expansion will require capital expenditure of \\( \\$ 22 M \\) at the beginning of the expansion \\( (t=0) \\). According to the IRS, this new capital equipment can be depreciated straight-line over the next 6 years. You estimate that you will sell that equipment at \\( t=5 \\) for \\( \\$ 800,000 \\). * The current plant is using existing capital equipment that was purchased 8 years ago for \\( \\$ 10 M \\). Following IRS rules, the existing capital equipment is being depreciated straight-line over 10 years (i.e. has tax shields left at \\( t=1 \\) and \\( t=2 \\), but not at \\( t=0 \\) ). This equipment will continue to be used whether the operations are expanded or not. You estimate that it will have a salvage value of \\( \\$ 200,000 \\) at \\( t=10 \\). * You estimate the followina workina canital reauirements (all fiaures in millions of dollars): * Your firm faces a tax rate of \30. * The discount rate is \8. Please put together the timetable and compute total incremental cash flows associated with this project expansion for each year \\( (t=0 \\) through \\( t=5 \\) )

Answer & Explanation Solved by verified expert

See Answer