1 answer

Assume that you just graduated from GW and are employed at an investment bank making $120,000...

Question:

Assume that you just graduated from GW and are employed at an investment bank making $120,000 (after-tax) per year, and you expect to make the same amount for each of the next 5 years. A classmate from MAT62, who knows what a hard party person you were, gives you a call and tries to convince you to join forces with him on a project. The project is to produce a new type of vodka, “Hangover’s over”, that won’t make one feel hangover the next morning no matter how many bottles one drinks. If you decide to join, you will have to quit your current job, and work full-time on the project. The project requires an initial investment of $400,000 in production equipment, which can be depreciated straight-line over 5 years to a salvage value of $80,000. You own a house that you’re currently renting out for $24,000 a year and you’re planning to use the house as your office if you join the project. You expect to sell 20,000 bottles of the “Hangover’s over!” at $40 per unit each year for the next 5 years. The production cost is $15 per unit, and fixed costs associated with the project are estimated to amount $150,000 per year. Assume that your tax rate is 40% and your discount rate for projects with similar risk is 12%. Should you accept the project?


Answers

7190 Calculation of cash inflow fiom the businesss 7191 7192 7193 7194 rate amount Sales Cost of production variable fixed cost Net income Tax Profit after tax Add Depreciation Net cash inflow 20,000 40 800,000 195 7196 7197 7198 7199 7200 7201 7202 7203 20,000.00 15300,000 150,000 140,000 210,000 64000(400000-80000)/5 274,000 Discount factor 12% Bussines Rent salary Year Investment salavage Total flow 7204 7205 206 7207 7208 7209 7210 7211 7212 7213 Income forgone foregone -400,000.00 0.89 0.80 0.71 0.64 0.57 274,000 274,000 274,000 274,000 274,00080,000.0024000 24000 24000 24000 24000 -400,000.00 400,000.00 120000 130,000.00 116,071.43 120000 130,000.00 103,635.20 120000130,000.00 92,531.43 120000 130,000.00 82,617.35 120000 210,000.00 119,159.64 Net benefit 114,015 214 As the net flow is positive ,therefore the project should be accepted

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