Tory B Inc., is considering a new three-year expansion project that requires an initial fixed...
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Tory B Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.3 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,450,000 in annual sales, with costs of $1,180,000. The tax rate is 35 percent.
A) Suppose the project requires an initial investment in net working capital of $250,000 and the fixed asset will have a market value of $300,000 at the end of the project. What is the projects Year 0 net cash flow? Year 1? Year 2? Year 3?
B) What are the three methods to evaluate stand-alone risk? (think about these!) Describe some pros and cons of each method to evaluate cash flows.
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