kovarthanan
Feb 8, 2013, 05:03 AM
Snail plc has recently completed a $400,000, 2 year-marketing study. Based on the results, Snails had estimated that 10,000 of its new cold rooms could be sold annually over the next 8 years at a price of $9,615 each. Subcontractors would install the cold rooms at a cost per installation of $7,400. Fixed costs to be incurred would be $12 million per year.
Start up costs include $40 million to build production facilities and $2.4 million in land. The $40 million facility will be depreciated using the straight line method to zero over the project life. At the end of the project's life, the facilities (including the land) will be sold for an estimated $8.4 million. The value of the land is not expected to change.
Finally, start-up would also entail fully deductible expenses of $1.4 million at year zero. Snails is an ongoing, profitable business and pay taxes at a 30% rate in the year of income on all income and gains. Snails uses a 10% discount rate on projects such as this one.
Based on the above scenario, you are required to :
a) calculate the Initial Project Cost. (4 marks)
b) calculate the annual after tax cash flows (year 1-8) ( 8 marks)
c) calculate the terminal cash flow at the end of the project life (3 marks)
d) determined the project NPV at 10% discount rate (4 marks)
e) on the ground of NPV, should Snails produce the cold rooms? And why?
(1 marks)
Start up costs include $40 million to build production facilities and $2.4 million in land. The $40 million facility will be depreciated using the straight line method to zero over the project life. At the end of the project's life, the facilities (including the land) will be sold for an estimated $8.4 million. The value of the land is not expected to change.
Finally, start-up would also entail fully deductible expenses of $1.4 million at year zero. Snails is an ongoing, profitable business and pay taxes at a 30% rate in the year of income on all income and gains. Snails uses a 10% discount rate on projects such as this one.
Based on the above scenario, you are required to :
a) calculate the Initial Project Cost. (4 marks)
b) calculate the annual after tax cash flows (year 1-8) ( 8 marks)
c) calculate the terminal cash flow at the end of the project life (3 marks)
d) determined the project NPV at 10% discount rate (4 marks)
e) on the ground of NPV, should Snails produce the cold rooms? And why?
(1 marks)