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# Analyzing cash flows of project

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Semi-con is considering a new investment proposal that involves manufacturing and selling a new semiconductor chip . They have identified a operational manufacturing plant that is available for lease, and eleven key sales districts. They have assembled the following information:

?Revenues are expected to be \$1,500,000, \$1,250,000, and \$1,125, 000 in each of the three years of the project's life, all taxable.
?The cost of sales is expected to be 60% of sales revenue.
?Lease payments for the manufacturing plant will be \$150,000 per year payable at the end of each year of occupancy.
?A new wafer processing machine will have to be purchased at a cost of \$900,000.
?The new machine will be depreciated straight-line down to its salvage value of \$450,000 over the three-year life of the project.
?The marginal tax rate of the client is 40%.
?The required return on such investments is 20% p.a.

Should they accept or reject the project? Support your answer with calculations/formulas.

#### Solution Preview

Please refer attached file for better clarity of tables and formulas.

Solution:

Year Revenues Costs of sales Lease payments Cost of water Depreciation Tax* Salvage Value Net cash flow** PVF PV
60% of sales processing m/c
0 ...

#### Solution Summary

Solution explains the steps for calculating annual after tax cash flows. It calculates Net Present Value of project.

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