Bear Stationaries is thinking about expanding its facilities. In considering the expansion, Bear’s CFO has obtained the following information: The expansion will require the company to purchase today (t = 0) $5 million of equipment. The equipment will be depreciated over the following four years at the following rate: Year 1: 33% Year 2: 45 Year 3: 15 Year 4: 7 The expansion will require the company to increase its net operating working capital by $500,000 today (t = 0). This net operating working capital will be recovered at the end of four years (t = 4). The equipment is not expected to have any salvage value at the end of four years. The company’s operating costs, excluding depreciation, are expected to be 60 percent of the company’s annual sales. The expansion will increase the company’s dollar sales. The projected increases, all relative to current sales are: Year 1: $3.0 million Year 2: 3.5 million Year 3: 4.5 million Year 4: 4.0 million (For example, in Year 4 sales will be $4 million more than they would have been had the project not been undertaken.) After the fourth year, the equipment will be obsolete, and will no longer provide any additional incremental sales. The company’s tax rate is 40 percent and the company’s other divisions are expected to have positive tax liabilities throughout the project’s life. If the company proceeds with the expansion, it will need to use a building that the company already owns. The building is fully depreciated; however, the building is currently leased out. The company receives $300,000 before-tax rental income each year (payable at year end). If the company proceeds with the expansion, the company will no longer receive this rental income. The project’s WACC is 10 percent. What is the proposed project's NPV and IRR

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

Bear Stationaries is thinking about expanding its facilities. In considering the expansion, Bear’s CFO has obtained the following information:

The expansion will require the company to purchase today (t = 0)
$5 million of equipment. The equipment will be depreciated over the following four years at the following rate:

Year 1: 33%

Year 2: 45

Year 3: 15

Year 4: 7

The expansion will require the company to increase its net operating working capital by $500,000 today (t = 0). This net operating working capital will be recovered at the end of four years (t = 4).
The equipment is not expected to have any salvage value at the end of four years.
The company’s operating costs, excluding depreciation, are expected to be 60 percent of the company’s annual sales.
The expansion will increase the company’s dollar sales. The projected increases, all relative to current sales are:

Year 1: $3.0 million

Year 2: 3.5 million

Year 3: 4.5 million

Year 4: 4.0 million

(For example, in Year 4 sales will be $4 million more than they would have been had the project not been undertaken.) After the fourth year, the equipment will be obsolete, and will no longer provide any additional incremental sales.

The company’s tax rate is 40 percent and the company’s other divisions are expected to have positive tax liabilities throughout the project’s life.
If the company proceeds with the expansion, it will need to use a building that the company already owns. The building is fully depreciated; however, the building is currently leased out. The company receives $300,000 before-tax rental income each year (payable at year end). If the company proceeds with the expansion, the company will no longer receive this rental income.
The project’s WACC is 10 percent.

What is the proposed project's NPV and IRR?

Expert Solution

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions