QUESTION 3: Energy East Corporation is considering an expansion of their production facility. The financial...
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QUESTION 3: Energy East Corporation is considering an expansion of their production facility. The financial data is as follows: - Investment: $2,200,000 30% debt equity ratio. Loan ($660,000) borrowed at 4% interest. - Project life: 6 years - Salvage value: $150,000 o Year 6 dollars - Depreciation method: 5-year MACRS - Income tax rate: 25% - Annual Revenue: $1,000,000 Year 0 dollars - Annual Expense: $400,000 o Year 0 dollars - Does NOT include depreciation - Does NOT include interest - Market interest rate ( i ): 12% If the general inflation rate (affects revenues, expenses, salvage value) during the next 6 years is expected to be 6% annually: a. Develop the income statement for the project. [12 points] b. Develop the cash flow statement for the project. [3 points] (Hint: Don't forget the Financing Activities) c. Determine the PW of the project. Is the project economically viable and why? [4 + 1 points] (Hint: Cash flows in Actual dollars, given market interest rate. Therefore, no need to convert to constant dollars before calculating PW)
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