In your new role as the Chief Financial Officer of Clean Water Solutions Co, it is your responsibility to oversee a new
Posted: Tue Nov 16, 2021 8:34 am
In your new role as the Chief Financial Officer of Clean Water
Solutions Co, it is your responsibility to oversee a new water
filtration project that is expected to last the next 10 years. The
company is considering investing in a new water filter for
refrigerators that will be priced at $210 each, while variable
costs for producing each filter are $130. Initial estimates suggest
that the company will sell 320,000 units in the project’s first
year, and the number of units sold is expected to increase by
10,000 units annually. The selling price per unit is expected to
decrease by $2 per year due to the release of newer versions.
Variable costs per unit are also expected to decrease annually due
to efficiency gains in the production process. Estimates suggest
that variable costs will decrease by $0.50 per year.
Fixed costs for the project are expected to be $12 million per
year. Moreover, the company will need to invest a total of $60
million in fixed assets. Clean Water Solutions Co. uses two forms
of depreciation for its fixed assets. The company uses
straight-line depreciation on its income statements, which assumes
that the fixed assets are 100% depreciable. Meanwhile, the company
uses the Modified Accelerated Cost Recovery System (MACRS) for tax
purposes when determining the tax implications on the sale of its
fixed assets. Assume that the fixed assets are classified as
15-year property under MACRS:
Depreciation Year
15-Year MACRS
1
5.00%
2
9.50%
3
8.55%
4
7.70%
5
6.93%
6
6.23%
7
5.90%
8
5.90%
9
5.91%
10
5.90%
11
5.91%
12
5.90%
13
5.91%
14
5.90%
15
5.91%
16
2.95%
At the end of the tenth year, the
company anticipates that it will sell this equipment for $18
million before taxes. Assume that the company is in a 21% corporate
tax bracket. The company will also require an additional investment
of $12 million in net working capital, and 100% of this investment
will be recovered at the end of year 10.
Assuming the minimum required return
on this project is 14%, what is its net present value? What is the
internal rate of return? Should the project be accepted or rejected
based on these financial metrics?
Solutions Co, it is your responsibility to oversee a new water
filtration project that is expected to last the next 10 years. The
company is considering investing in a new water filter for
refrigerators that will be priced at $210 each, while variable
costs for producing each filter are $130. Initial estimates suggest
that the company will sell 320,000 units in the project’s first
year, and the number of units sold is expected to increase by
10,000 units annually. The selling price per unit is expected to
decrease by $2 per year due to the release of newer versions.
Variable costs per unit are also expected to decrease annually due
to efficiency gains in the production process. Estimates suggest
that variable costs will decrease by $0.50 per year.
Fixed costs for the project are expected to be $12 million per
year. Moreover, the company will need to invest a total of $60
million in fixed assets. Clean Water Solutions Co. uses two forms
of depreciation for its fixed assets. The company uses
straight-line depreciation on its income statements, which assumes
that the fixed assets are 100% depreciable. Meanwhile, the company
uses the Modified Accelerated Cost Recovery System (MACRS) for tax
purposes when determining the tax implications on the sale of its
fixed assets. Assume that the fixed assets are classified as
15-year property under MACRS:
Depreciation Year
15-Year MACRS
1
5.00%
2
9.50%
3
8.55%
4
7.70%
5
6.93%
6
6.23%
7
5.90%
8
5.90%
9
5.91%
10
5.90%
11
5.91%
12
5.90%
13
5.91%
14
5.90%
15
5.91%
16
2.95%
At the end of the tenth year, the
company anticipates that it will sell this equipment for $18
million before taxes. Assume that the company is in a 21% corporate
tax bracket. The company will also require an additional investment
of $12 million in net working capital, and 100% of this investment
will be recovered at the end of year 10.
Assuming the minimum required return
on this project is 14%, what is its net present value? What is the
internal rate of return? Should the project be accepted or rejected
based on these financial metrics?