JUST NEED HELP WITH #3
Answer the next four problems with the following facts.
The managers of PonchoParts. Inc. plan to manufacture engine blocks for classic cars from the 1960’s era. They expect to sell 250 engine blocks annually for the next 5 years. The necessary foundry and machining equipment will require an outlay of $800,000. This amount will be depreciated straight line to zero over the project life. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labor and material costs total $500 per block; fixed costs are $125,000 per year. Assume a 34% tax rate and a 12% discount rate.
1. What is the annual depreciation tax shield for this project (remember the tax shield is the amount after tax that you receive).
2. What is the expected after-tax cash flow to the firm from salvage when the equipment is sold in year 5?
****#3. Assume that management believes that auto restorers will pay $3,000 retail per engine block. What is the NPV of this project?
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