1. The following information is given to you by Onita Corporation for a new project.
The project has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life.
WACC 10.0%
Net investment in fixed assets (depreciable basis) $70,000
Required new working capital $10,000
Straight-line deprec. rate 33.333%
Sales revenues, each year $75,000
Operating costs (excl. deprec.), each year $30,000
Expected pretax salvage value $5,000
Tax rate 35.0%
What is the project's NPV? What is the project's IRR?(3.5 Points)
2. A year ago, Ammar Company had inventory in Britain valued at 240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2 U. S. dollars. This year the exchange rate is 1£ = 1.82 U. S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U. S. dollars as a result of the change in exchange rates?(1.5 points)