Forecasted tax inflation rate: 2% a year
Company tax rate: 35%
Nominal cost of capital: 9%
The project cost is estimated at $90 million
Projected revenues and costs in real terms:
|
|
|
Projected
|
Costs
|
In
|
Millions
|
|
Investment
|
Year 0
|
1
|
2
|
3
|
4
|
5-15
|
|
Land
|
30
|
|
|
|
|
|
|
Constr.
|
20
|
30
|
10
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Rentals
|
|
|
|
12
|
12
|
12
|
|
Sales %
|
|
|
|
24
|
24
|
24
|
|
Costs
|
2
|
4
|
4
|
10
|
10
|
10
|
|
RE Tax
|
2
|
2
|
3
|
4
|
4
|
4
|
Part 1: Analyze the numbers given in the case. Make sure that you understand which numbers represent costs and which represent receipts. Also note the inflation assumption, which can be dealt with in either of two ways (which you use is your choice). In case you are not familiar with the term, straight line depreciation means that depreciable cost is equally divided among the number of years used, so that depreciation expense is the same each year (do not use the MACRS method).
You need to calculate the following:
- The annual cash flows for years 0 - 17, including appropriate tax adjustments (note that years 0 - 2 will be negative)
- The NPV and IRR of the cash flows