Targaryen Aeronautics is exploring the possiblity of making a significant purcha

Question

Targaryen Aeronautics is exploring the possiblity of making a significant purchase of a new alternative aircraft technology to add to their current fleet - a dragon. The purchase price of the dragon is expected to be $4,000,000 with additional shipping and installation expenses of $1,000,000. Maintenance of the dragon will require an increase in working capital of $2,000,000. The dragon is expected to genreate additional annual sales of $2,500,000 over the next four years, additonal opperating costs of $230,000 and depreciation each year according to the MACRS schedule of 33%, 45%, 15%, and 7% respectively. Targaryen's tax rate is 40% and their required rate of return is 9.2%. Targaryen expects to be able to sell the dragon at the end of the project's life for 20% of the original purchase price of the dragon, and they also expect to be able to recoup the original additional investment in working capital.

The initial investment required for the dragon will be:

a. $3,800,000

b. $4,200,000

c. $4,800,000

d. $5,000,000

e. $5,200,000

Explanation / Answer

The initial investment required = purchase price + shipping and installation expense

= 40,00,000 + 10,00,000

= 5000000

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