1. Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over 5 years to an expected salvage value of $5,000, 35% tax rate, $45,000 additional annual revenues, $15,000 additional annual expense, $8,000 additional investment in working capital, and 11% cost of capital. Show your work and formulas.
2. Calculate the present value of the depreciation tax shield for an asset in the 3-year class life costing $100,000. Three-year class percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively for years 1 through 4. The firm has a 35% tax rate and a 10% cost of capital. Compare this present value to that calculated for straight-line depreciation with no salvage value. Show your work and formulas.
3. Suppose a firm has a cost of capital (WACC) of 15% and, furthermore, it has an existing capital project which is estimated to produce a NPV of $250,000. By what minimum amount must the initial cost of the project decrease (assuming revenues will be unchanged) before you would wait 2 years to invest?
1. Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over 5 years to an expected salvage value of $5,000, 35% tax rate, $45,000 additional annual revenues, $15,000 additional annual expense, $8,000 additional investment in working capital, and 11% cost of capital. Show your work and formulas.
2. Calculate the present value of the depreciation tax shield for an asset in the 3-year class life costing $100,000. Three-year class percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively for years 1 through 4. The firm has a 35% tax rate and a 10% cost of capital. Compare this present value to that calculated for straight-line depreciation with no salvage value. Show your work and formulas.
3. Suppose a firm has a cost of capital (WACC) of 15% and, furthermore, it has an existing capital project which is estimated to produce a NPV of $250,000. By what minimum amount must the initial cost of the project decrease (assuming revenues will be unchanged) before you would wait 2 years to invest?
