Project #15077 - Finance

Questions are based on the following mini-case:

CGX Transmitters is developing a 2nd generation optical transmitter. Their finance department is on a team-building retreat in the Pocono Mountains. The CEO needs the capital budget on his desk tonight. He knows that you are taking FIN 305W, and that you can complete the budget that the finance group started. You have the following information:

- The project will last for four years.
- The initial investment in equipment is $20 million. The firm will use a straight line depreciation schedule in years one to four, with the book value of the equipment going down from $20 million in year zero down to a book value of $4 million in year four. (Hint: You have to include the after-tax salvage value of equipment in your NCF.)
- The salvage value (re-sale value) of the equipment will be $6 million in year four.
nd
- The firm spent $4.5 million on R&D last year in order to research the technology behind the 2 generation transmitter.
- The accounting department will assign a $0.2 million administration costs per year for years one to four. You check with them, and they give you the following breakdown: $75,000 a year for accounting services to produce paperwork necessary to run the project and comply with federal and state regulations, and $125,000 towards the overall costs of maintaining the firm’s headquarters. Even though the headquarters

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will not be involved with running this project, they argue that the cost of the headquarters has to be spread over all existing projects. Both numbers are net of taxes. st
- If you undertake this project, operating income before tax of the 1 generation optical transmitter will decline by an annual amount of $0.4 million for each of the next four years - The tax rate is 35%.

- The cost of capital is 9%.
- Assume that the firm’s other projects yield a positive income before tax. 

Subject Business
Due By (Pacific Time) 10/27/2013 12:00 am
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