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Question: mervis enterprises is considering a new threeyear expansion project that...

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4- (8 pts) Mervis Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2 million. The project also requires using a piece of land you have already owned. land used was purchased three years ago fors4 million if the firm decid tonot The the expansion project and rent out the land for three years, is estimated to generate $3 million in today. The project 3. The project requires annual sales, with costs of $1.5 million from year 1 Year project an initial investment in net working capital of $0.4 million and after the value you retrieve the investment in net working capital. The fixed asset will be sold at a market of $1 million at the end of year 3. Tax rate is 35 percent. The fixed asset falls into the three-year MACRS class. Property Class Year Three-Year Five-Year Seven-Year 33.339% 14.2996 20.00% 44.45 24.49 32.00 14.81 17.49 7.41 11.52 12.49 8.93 11.52 8.92 5.76 8.93 4.46 a. (3pts) calculate cash flow from assets (free cash flow) of the three-year expansion project from year 0 to year 3. b. (2 pts) The annual discount rate is 10%.whats the NPvof expansion project? Should you take the expansion project? (Hint: you need to consider opportunity costsas well) pts) The IRS gives you a second option to depreciate the fixed assets by 10% in year 1,10% in year 2, 10% in year 3, and 7o% in year 4. If you chose the second option, would the NPv be higher than or lower than NPw when using MACRS? Briefly explain the reason (intuition). (Hint: You dont have to do any calculations for this q the total amount of taxes you pay on fixed assets affected by depreciation methods? lsthe timing of tax payments affected by depreciation methods? intuition (reason) gives If you dont know the answer, showing your calculations without the you partial credits (2 pts).)
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