Optomics Ltd. is investigating an expansion of its services. After consultation with industry, the following two projects are available for investment: Project A Project B CAPEX / Initial Outlay $10,000,000 $21,000,000 Project life Revenue (per year) 8 years $6,000,000 $2,000,000 $1,000,000 7 years $9,000,000 $1,500,000 $2,000,000 Variable costs Operating expense Investment in Net Working Capital (Year 0) $1,500,000 $2,500,000 The company's tax rate is 30% and uses a straight-line depreciation method. There will be no 'salvage' value associated with these projects at the end of their project life. Official Liquidators has a required rate of return of 10% per annum. a) Determine the Free Cash Flows, for each year, to the firm for both projects. b) Identify which project you recommend the company invest in. c) What is meant by incremental cash flows from a capital budgeting perspective? Why should only incremental cash flows be included in the project valuation process?

Optomics Ltd. is investigating an expansion of its services. After consultation with industry, the following two projects are available for investment: Project A Project B CAPEX / Initial Outlay $10,000,000 $21,000,000 Project life Revenue (per year) 8 years $6,000,000 $2,000,000 $1,000,000 7 years $9,000,000 $1,500,000 $2,000,000 Variable costs Operating expense Investment in Net Working Capital (Year 0) $1,500,000 $2,500,000 The company's tax rate is 30% and uses a straight-line depreciation method. There will be no 'salvage' value associated with these projects at the end of their project life. Official Liquidators has a required rate of return of 10% per annum. a) Determine the Free Cash Flows, for each year, to the firm for both projects. b) Identify which project you recommend the company invest in. c) What is meant by incremental cash flows from a capital budgeting perspective? Why should only incremental cash flows be included in the project valuation process?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...

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