Bronco Co. is considering a new project that complements its existing business. The machine required for the project costs $3.65 million. The marketing department predicts that sales related to the project will be $2.65 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 40 percent (the 40 percent represents both COGS and Op. Exp.) of sales. The company also needs to add net working capital of $175,000 mmediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 22 percent and the required return for the project is 12 percent. Should the company proceed with the
Bronco Co. is considering a new project that complements its existing business. The machine required for the project costs $3.65 million. The marketing department predicts that sales related to the project will be $2.65 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 40 percent (the 40 percent represents both COGS and Op. Exp.) of sales. The company also needs to add net working capital of $175,000 mmediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 22 percent and the required return for the project is 12 percent. Should the company proceed with the
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
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Bronco Co. is considering a new project that complements its existing business. The machine required for the project costs $3.65 million. The marketing department predicts that sales related to the project will be $2.65 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 40 percent (the 40 percent represents both COGS and Op. Exp.) of sales. The company also needs to add net working capital of $175,000 mmediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 22 percent and the required return for the project is 12 percent. Should the company proceed with the
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