1) Your company is considering a new project that will require $945,000 of new e
ID: 2633887 • Letter: 1
Question
1) Your company is considering a new project that will require $945,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $145,000 using straight-line depreciation. The cost of capital is 13 percent, and the firm
1) Your company is considering a new project that will require $945,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $145,000 using straight-line depreciation. The cost of capital is 13 percent, and the firm
Explanation / Answer
Hi,
The correct answers are as follows:
1 Annual Depreciation = (price of equipment-book value)/no. of useful years
= (945000-145000)/10
=$80000
Tax benefit = tax rate*annual dpreciation
=34%*80000
=$27200
Present Value:
Hence, the present value is $147593.82
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2. Accoring to CAPM model,
cost of equity = risk free rate + beta*(market risk-risk free rate)
cost of equity = 5%+1.1*(13.5%-5%)
=14.35%
Hence, 14.35% is the cost of equity
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3. After tax salvage value = salvage value -((salavage value-book value)*tax rate)
=123000-((123000-143000)*40%)
=$131000
hence, $131000 will be added to the cash flow
Year Cashflow Present Value 1 27200 24070.80 2 27200 21301.59 3 27200 18850.96 4 27200 16682.27 5 27200 14763.07 6 27200 13064.66 7 27200 11561.65 8 27200 10231.55 9 27200 9054.47 10 27200 8012.80 Present Value 147593.82Related Questions
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