Question: You have been given the following information on a project:
• It has a 5-year lifetime
• The initial investment in the project will be $25 million, and the investment will be depreciated straight line, down to a salvage value of $10 million at the end of the fifth year.
• The revenues are expected to be $20 million next year and to grow 10% a year after that for the remaining 4 years.
• The cost of goods sold, excluding depreciation, is expected to be 50% of revenues.
• The tax rate is 40%.
a. Estimate the pre-tax return on capital, by year and on average, for the project.
b. Estimate the after-tax return on capital, by year and on average, for the project.
c. If the firm faced a cost of capital of 12%, should it take this project.