would you pursue the project under these new conditions explain your answer 544072 | Homework Solutions

Project Evaluation. Virtual Printing Inc. has devised a new technology based on which it plans to launch a new line of print media products. The firm intends to spend $160,000 in new plan! And equipment land $40,000 in expanding its building facilities to house the project. The project has an estimated economic life of eight years. Assume, for tax purposes, that the machinery and equipment and building will be depreciated straight-line over its economic life.

In the first year of operation, Virtual Printing expects to generate sales revenues of $60,000. These revenues are expected to stay at the same level until Year 3 but are subsequently expected to grow by 10 percent annually until Year 6, after which the revenues are expected to decline by 5 percent per year. First-year operating costwill be $15,000; in subsequent years, these are expected to grow in proportion to sales revenue.

The tax rate applicable to Virtual Printing”s business will be J4 percent. Also, at the end of the project”s economic life, the plant and equipment will not have any salvage value. The expanded building facilities also cannot be sold, leased or rented to another business entity without compromising the firm”s existing operations. Virtual Printing”s cost of capital is 12 percent.

a. Should Virtual Printing”s finance manager recommend accepting the project if the firm”s objective is to accept projects only when they are worth more than their cost?

b. Explain your answer to pan (a) above. What technique did you use in your answer to pan (a)?

c. By what time frame can Virtual Printing expect to recover its initial investment in the project:

(I) ignoring the lime value of money, and (2) taking into account the time value of money”! Name the techniques you have used for your computation. What arc the benefits and drawbacks to these techniques?

d. What is the IRR for this project?

e. Now, assume that for CCA purposes, the plan and equipment actually belong to asset Class 39 and the buildings belong to asset Class 1. with applicable CCA rates of 25 percent and 4 percent, respectively. Recomputed the project”s net present value, assuming that Virtual Printing has other assets in both asset classes that will be continued even after the economic life of this project is over. Work out your calculations assuming a zero salvage value for the building expansion and a $10,000 salvage value for the plant and equipment, at the end of the project”s economic life. Would you pursue the project under these new conditions? Explain your answer.