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You have made the following estimates for a new project you are considering: • The initial…

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You have made the following estimates for a new project you are considering: • The initial investment will be $18 million, and the project will have a 5-year timeline. The investment will be depreciated using the straight-line method and the salvage value is expected to be $8 million at the end of the 5 years. • The revenues are expected to be $22 million in year 1 and will grow by 5% each year after that for the remaining 4 years. .T The cost of goods sold (not including the depreciation) is expected to be 55% of revenues each year. • The tax rate is 35% and the cost of capital is 15%. The after-tax operating income for Year 3 is $5.794588 Million

True False

Question 2 You have made the following estimates for a new project you are considering: • The initial investment will be $18 million, and the project will have a 5-year timeline. The investment will be depreciated using the straight-line method and the salvage value is expected to be $8 million at the end of the 5 years. • The revenues are expected to be $22 million in year 1 and will grow by 5% each year after that for the remaining 4 years. • The cost of goods sold (not including the depreciation) is expected to be 55% of revenues each year. • The tax rate is 35% and the cost of capital is 15%. The pre-tax return on capital for Year 3 is 68.58%. True False

Question 3 You have made the following estimates for a new project you are considering: • The initial investment will be $18 million, and the project will have a 5-year timeline. The investment will be depreciated using the straight-line method and the salvage value is expected to be $8 million at the end of the 5 years. • The revenues are expected to be $22 million in year 1 and will grow by 5% each year after that for the remaining 4 years. • The cost of goods sold (not including the depreciation) is expected to be 55% of revenues each year. • The tax rate is 35% and the cost of capital is 15%. The after-tax return on capital for Year 3 is 14.67% True False

Question 4 You have made the following estimates for a new project you are considering: • The initial investment will be $18 million, and the project will have a 5-year timeline. The investment will be depreciated using the straight-line method and the salvage value is expected to be $8 million at the end of the 5 years. • The revenues are expected to be $22 million in year 1 and will grow by 5% each year after that for the remaining 4 years. The cost of goods sold (not including the depreciation) is expected to be 55% of revenues each year. • The tax rate is 35% and the cost of capital is 15%. Based on the return on capital decision rule, you should reject the project. . True False

Question 5 You have made the following estimates for a new project you are considering: • The initial investment will be $18 million, and the project will have a 5-year timeline. The investment will be depreciated using the straight-line method and the salvage value is expected to be $8 million at the end of the 5 years. • The revenues are expected to be $22 million in year 1 and will grow by 5% each year after that for the remaining 4 years. • The cost of goods sold (not including the depreciation) is expected to be 55% of revenues each year. • The tax rate is 35% and the cost of capital is 15%. Assume 25% of the initial investment was financed with an interest only loan (interest is paid each year, and the full principal payment is due at the end of 5 years). The cost of debt is 9%. The net income is for Year 3 is $6.14 million. True False

Question 6 You have made the following estimates for a new project you are considering: • The initial investment will be $18 million, and the project will have a 5-year timeline. The investment will be depreciated using the straight-line method and the salvage value is expected to be $8 million at the end of the 5 years. • The revenues are expected to be $22 million in year 1 and will grow by 5% each year after that for the remaining 4 years. • The cost of goods sold (not including the depreciation) is expected to be 55% of revenues each year. • The tax rate is 35% and the cost of capital is 15%. Again, assuming 25% of the initial investment was financed with an interest only loan (interest is paid each year, and the full principal payment is due at the end of 5 years). The cost of debt is 9%. The return on equity for Year 3 is 65.07% True False

Question 7 You have made the following estimates for a new project you are considering: • The initial investment will be $18 million, and the project will have a 5-year timeline. The investment will be depreciated using the straight-line method and the salvage value is expected to be $8 million at the end of the 5 years. • The revenues are expected to be $22 million in year 1 and will grow by 5% each year after that for the remaining 4 years. • The cost of goods sold (not including the depreciation) is expected to be 55% of revenues each year. • The tax rate is 35% and the cost of capital is 15%. The cost of equity is 20%. Based on the return on equity decision rule, you should accept the project. True False

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