ForeverConfused
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- Apr 9, 2017
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A company estimates 16,500 units of a new product could be sold annually over the next 8 years at a price of $23,500 each. Variable cost per unit is $19,700, and fixed costs total $31 million per year. Start-up costs include $80 million to build production facilities, $4.50 million in land, and $15 million in net working capital. The $80 million facility is made up of a building valued at $12 million and $68 million of equipment. The building and equipment qualify for CCA rates of 4% and 20%, respectively. At the end of the project's life, the facilities (including the land) will be sold for an estimated $19.80 million. Assume the building's portion of this value will be $6.50 million. Start-up would also require initial expenses of $3.10 million, which are tax deductible. The company pays taxes at a 33% rate and uses a 16% discount rate on projects such as this one.
1. What is the cash flow in year 0? ANSWER: -101,577,000
My working: -80,000,000 - 4,500,000 - 15,000,000 - 31,00,000(1 - .33) = -101,577,00
2. What is the annual after-tax cash flow excluding the depreciation tax shield in the middle years of the project's life? (i.e. years 1-7)? ANSWER: 21,239,000
My working: [((-19,700*16,500) - 31,000,000) + (16,500*23,500](1 - .33) = 21,239,000
3. What is the after tax cash flow expluding the depreciation tax shield in year 8? ANSWER: $56,039,000
My working: [19,800,000 (salvage value) + 15,000,000 (NWC)] (1 - .33) = 23,316,000
I can't figure out how to get the correct value.
4. What is the PV of the CCA tax shield of the building and of the equipment? ANSWER: PVCCATSB = 606,523.39; PVCCATSE = 11,114,788.81
My working: \(\displaystyle PVCCATSB\, =\, \left[\dfrac{12000000(.33)(.04)}{.04+.16}\right]\, \cdot\, \left[\dfrac{1+.05(.04)}{1+.04}\right]\, -\, \left[\dfrac{6500000(.04)(.33)}{.04+.16}\right]\, \cdot\, \left[\dfrac{1}{1.16^8}\right]\)
I can't figure this part out either.
5. What is the NPV? ANSWER: 13,012,725.12
Any help is appreciated.
1. What is the cash flow in year 0? ANSWER: -101,577,000
My working: -80,000,000 - 4,500,000 - 15,000,000 - 31,00,000(1 - .33) = -101,577,00
2. What is the annual after-tax cash flow excluding the depreciation tax shield in the middle years of the project's life? (i.e. years 1-7)? ANSWER: 21,239,000
My working: [((-19,700*16,500) - 31,000,000) + (16,500*23,500](1 - .33) = 21,239,000
3. What is the after tax cash flow expluding the depreciation tax shield in year 8? ANSWER: $56,039,000
My working: [19,800,000 (salvage value) + 15,000,000 (NWC)] (1 - .33) = 23,316,000
I can't figure out how to get the correct value.
4. What is the PV of the CCA tax shield of the building and of the equipment? ANSWER: PVCCATSB = 606,523.39; PVCCATSE = 11,114,788.81
My working: \(\displaystyle PVCCATSB\, =\, \left[\dfrac{12000000(.33)(.04)}{.04+.16}\right]\, \cdot\, \left[\dfrac{1+.05(.04)}{1+.04}\right]\, -\, \left[\dfrac{6500000(.04)(.33)}{.04+.16}\right]\, \cdot\, \left[\dfrac{1}{1.16^8}\right]\)
I can't figure this part out either.
5. What is the NPV? ANSWER: 13,012,725.12
Any help is appreciated.
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