##### FINANCE 322-01CAPITAL BUDGETING MANAGEMENTFall 2015HOMEWORK #9You-(Answered)

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FINANCE 322-01CAPITAL BUDGETING MANAGEMENTFall 2015HOMEWORK #9You are considering starting your own small business. The venture will incorporated in the state of NewJersey. Therefore, you will pay taxes according to the normal Federal corporate tax schedule (shown inHandout #6), and also according to the New Jersey state corporate tax schedule (given below). You wouldplace the plant on a piece of property that you already own. Today you could probably sell this propertyfor $115,000 (net of any capital gain tax effects).For the venture you will need to build a plant that will cost you $1,450,000. This building will bedepreciated by the fifteen-year MACRS schedule. The initial machinery needed for the operation will cost$450,000 and will be depreciated by the seven-year MACRS schedule. This equipment should have anoperating life of five years. At the end of this life you estimate that you could sell the machinery for$105,000. You will then need to buy a second machine that will probably cost $475,000. This machinewill also be depreciated by seven-year MACRS schedule. You also expect this equipment to have anoperating life of five years, and at the end of this life, you estimate that you will be able to sell this secondmachine for $107,000. At that point you will need to purchase a third machine, which will probably cost$500,000. This will also be depreciated by the seven-year MACRS schedule, and should again have anoperating life of five years, and should have a value of $110,000. You will then need to purchase a fourthmachine that will probably cost $525,000, and will be depreciated by seven-year MACRS schedule. Youplan to operate this venture for nineteen years. At that point you will have to pay $150,000 to demolishthe plant. You will probably be able to sale the remaining machinery for $125,000.You feel that sales will be $520,000 in the first year of operation. For the next six years you think thatsales will grow at 25% annually. For the following seven years you expect that sales will grow at 5% peryear. Then, you feel that annual sales will decline by 25% annually for the final five years of operation. Inthe early life of the operation annual fixed costs should be $200,000, but as the plant get older, they willprobably rise. So you assume that fixed costs will go to $220,000 in the thirteenth year of operations.Assume variable costs will be 24% of sales throughout the life of the plant.You will probably need a stock of $67,000 of net working capital at the outset. Then net working capitalshould be about 14% of sales throughout the life of the operation.If you require a return of 20%, determine whether you should invest in this venture.New Jersey Corporate Tax CodeTaxable Income Tax on Base Amount Marginal Tax Rate$0 - $50,000 6.50%$50,000 - $100,000 $3,250 7.50%Over $100,000 $7,000 9.00%

FINANCE 322-01

CAPITAL BUDGETING MANAGEMENT

Fall 2015

HOMEWORK #9

You are considering starting your own small business. The venture will incorporated in the state of New

Jersey. Therefore, you will pay taxes according to the normal Federal corporate tax schedule (shown in

Handout #6), and also according to the New Jersey state corporate tax schedule (given below). You would

place the plant on a piece of property that you already own. Today you could probably sell this property

for $115,000 (net of any capital gain tax effects).

For the venture you will need to build a plant that will cost you $1,450,000. This building will be

depreciated by the fifteen-year MACRS schedule. The initial machinery needed for the operation will cost

$450,000 and will be depreciated by the seven-year MACRS schedule. This equipment should have an

operating life of five years. At the end of this life you estimate that you could sell the machinery for

$105,000. You will then need to buy a second machine that will probably cost $475,000. This machine

will also be depreciated by seven-year MACRS schedule. You also expect this equipment to have an

operating life of five years, and at the end of this life, you estimate that you will be able to sell this second

machine for $107,000. At that point you will need to purchase a third machine, which will probably cost

$500,000. This will also be depreciated by the seven-year MACRS schedule, and should again have an

operating life of five years, and should have a value of $110,000. You will then need to purchase a fourth

machine that will probably cost $525,000, and will be depreciated by seven-year MACRS schedule. You

plan to operate this venture for nineteen years. At that point you will have to pay $150,000 to demolish

the plant. You will probably be able to sale the remaining machinery for $125,000.

You feel that sales will be $520,000 in the first year of operation. For the next six years you think that

sales will grow at 25% annually. For the following seven years you expect that sales will grow at 5% per

year. Then, you feel that annual sales will decline by 25% annually for the final five years of operation. In

the early life of the operation annual fixed costs should be $200,000, but as the plant get older, they will

probably rise. So you assume that fixed costs will go to $220,000 in the thirteenth year of operations.

Assume variable costs will be 24% of sales throughout the life of the plant.

You will probably need a stock of $67,000 of net working capital at the outset. Then net working capital

should be about 14% of sales throughout the life of the operation.

If you require a return of 20%, determine whether you should invest in this venture.

New Jersey Corporate Tax Code

Taxable Income

$0 - $50,000

$50,000 - $100,000

Over $100,000

Tax on Base Amount

$3,250

$7,000

Marginal Tax Rate

6.50%

7.50%

9.00%

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