Antonio Melton, the chief executive officer of Melton Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $500,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following:
Year 1 Year 2 Year 3 Year 4
$105,000………….. $120,000…………… $150,000………….. $225,000
Mr. Melton agrees with his advisers that the company should use the (required rate of return) of 7 percent to compute to evaluate the viability of the proposed project.
Required
Round your computation to the nearest whole dollar.
a. Compute the of the proposed project. Should Mr. Melton approve the project?
b. Shawn Love, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible. The depreciation is expected to be $100,000 per year for the four-year period. The company’s income tax rate is 30 percent per year. Use this information to revise the company’s expected cash flow from this project.
c. Compute the of the project based on the revised cash flow forecast. Should Mr. Melton approve the project?
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