A project manager is evaluating whether it is economical to develop a project requiring expenditures at time 0 of $20000 for land, $30,000 for inventory working capital, $80,000 for a steel building, $240,000 for equipment and $60,000 for vehicles. starting in year 1 the manager estimates that production will generate annual end-of-year escalated revenue of $500,000 with escalated operating cost of $300,000. Operating costs and revenue will both escalate at a compunding interest rate of 10% per year beginning in year 2. Use straight-line depreciation over 39 years for the building cost starting in year 1 assuming 12 months of service when computing your allowable deduction unde the mid-month convention. use 7-year MACRS depreciation rate for the qualifying equipment cost starting in year 1 with the half-year convention and the 5-year MACRS rate for the vehicle cost, again, starting in year 1 with the half-year convention. The applicable combined federal state income tax rate is 40%. No Other income exists against which to utilize deduction so carry any losses forward.
A) Calculate the project cash flows for the first 4 years of this business. This problem involves practicing calculating cas flow in producing years of a project, neglect any sale value applicable write-offs at the end of year 4 assuming the project continue.
B) Calculate the project cash flows for the first 4 years of this business and also consider the after tax cash flow that would be realized if the business were to be sold at the end of year 4 for value of $600,000. write off all remaining tax book values at the end of year 4 to determing taxable gain (or loss) and treat the sales as ordinary income. for a minimum rate of return 15%, calculate the overall project NPV, DCFROR and PVR based on the 4 years of ATCF including the sale value.