Bourque Enterprise is considering a new four-year project.
The company bought some land a year ago for $200,000 in anticipation of using it as a manufacturing production site. Based on a recent appraisal, the company believes it could sell the land for $235,000 on an after-tax basis. In four years, the land could be sold for $250,000 after taxes.
The company projects unit sales as follows at a price of $100 per unit.
Year Unit sales
1 9,000
2 9,000
3 7,000
4 3,000
Total fixed costs are $125,000 per year, and the variable product costs will be 25 percent of sales. The plant and equipments required for the project will cost $510,000. A five-year MACRS depreciation is used. At the end of the project, these fixed assets can be sold for $55,000 before tax.
The project will require net operating working capital equal to 20 percent of sales that must be accumulated in the year prior to sales, to support inventory and the credit sales to customers.
The tax rate is 22 percent. The required return is 11 percent. The two questions are "1d. What value should you use for the total capital expenditure at the beginning of the project for all the fixed assets involved?" and "1e. What value should you use for the total capital recovered at the end of the project for all the fixed assets involved?" Now the answers are -745000 for the first one and 312288 for the second one. Please explain how to come to these solutions. Thanks!