Economics Homework Help

Papa Bear Company, show all work in excel.

• A project requires an initial investment of $400,000 and is expected to produce additional sales revenue of $250,000 per year, which thereafter should grow at the rate of inflation. Costs of goods sold are estimated at 61% of sales. It is expected that cashflows will carry on for 6 years. In year 7 the project will wind down, and revenue will be half of the year 6 amount.
• The project will require additional working capital of 10% of sales. As working capital ramps up, charge ½ of the year 1 value (5% of sales) in Year 0 and then apply the additional amount required each year. Simply apply the same growth rate as a use of cash. At the end of the project life, assume all the working capital is recovered in year 7.
• Papa Bear’s public debt trades at 8% and they estimate their cost of equity at 14%, the debt/equity composition is 40/60
• Papa Bear expects no salvage value
• Expect inflation to be 2%

Scenario One: Under the old tax law, pre-2018, corporate income taxes were 35% and assets could be depreciated on a modified accelerated cost recovery system (MACRS) schedule which permitted depreciation of 20%, 32%, 20%, 16%, and 12% of the asset purchase cost in years 1-5 respectively.

Fill (only) these cells with yellow paint NPV (1 pt), and IRR (1 pt); no partial credit. (Total is 2pts)

Scenario Two: Under the 2018 tax law, Papa Bear pays corporate taxes at a rate of 21% and – again under this new tax law – accelerated depreciation allows the depreciation of the entire initial investment for tax purposes in the first year.

Fill (only) these cells with yellow paint: Cost of Capital (1 pt), NPV (1 pt), IRR (1 pt), no partial credit. (Total is 3 pts)

What was the impact of the new tax changes on the cost of capital, and the attractiveness of corporate investments? (one sentence, highlighted in yellow)