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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.

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    Solution Preview

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


    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.