(1 Consider the following project: Q1426. Project Real Physical Lifespan Cost Gr

Question

(1 Consider the following project: Q1426. Project Real Physical Lifespan Cost Gross Output 6 years $150 $50 in year 1 $80 in year 2 $90 in year 3 $50 in year 4 $25 in year 5 $0 in year 6 $5/year $5/year Overall Cost of Capital 12%/year Corporate Tax Rate ()40%/year - Input Costs (cash) Selling Costs (cash) Available Financing Debt Capacity Debt Interest Rate $50 10%/year Accounting Treatment Accounting Life Depreciation Method 3 years Linear Assume customers pay one year after delivery. Construct (the relevant items of) the balance sheet, the income state- ment, and the cash-flow statement. Compute the value of this firm, both from finance principles and from the finan- cial statements. (Please note that this is a time-intensive question--almost a mini-case.) 0 14 7 n

Explanation / Answer

Net inflow after tax is -14 plus initial costs -$150 therefore we should not accept the project as cost exceeds the cash inflow.

Year end Gross Output Input cost Selling cost depreciation Interest Costs After tax PV of the output 1 50 5 5 50 5 -15 -13.39 2 80 5 5 50 5 0* 0 3 90 5 5 50 5 21 14.95 4 50 5 5 0 5 21 13.34 5 25 5 5 0 5 6 3.4 6 0 0 0 0 5 -5 -2.5

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