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Question: The following problem is going to require you to decide which of the following two projects has t…
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Question: The following problem is going to require you to decide which of the following two projects has t...

Show transcribed image text The following problem is going to require you to decide which of the following two projects has the best rate of return. A) The company, ABC Beer Capital Company is seeking to start a new line of beer, a maple bacon beer. The company is going to have to purchase two pieces of machinery, a special fermenting barrel and a bacon maple extraction machine. Both machines together cost $1, 500,000. The machines are considered 7-year assets. Please see appendix 1 for the MACRS tables. The company is expecting the project to last 5 years, i.e. the maple/bacon beer fad is expected to be over at that time. The company expects to sell the machinery for $100,000 at the end of year 5. Now for the operations part of the equation, the company is expected to sell $500,000 of beer in the first year, and sales are expected to increase by 10% per year through year 5. The variable costs are 20% of sales, and fixed costs are $50,000 in year one, increasing at 5% per year. The company will close this project down at the end of year five. The company's discount rate is 12%. The corporate tax rate is 40% B) The same company, ABC Beer Capital Company is currently using certain equipment it can repurpose for a cost of S100,000 and create a unique IPA. The additional costs can be expensed in the first year, so no depreciation is required. The company expects sales of $150,000 per year for the next 5 years. The variable costs are 40% and the fixed costs are $25,000 per year. At the end of the five years, the company can sell the repurposed equipment for $20,000, which would be considered 100% gain. Again, the company's discount rate is 12%. The corporate tax rate is 40%.

The following problem is going to require you to decide which of the following two projects has the best rate of return. A) The company, ABC Beer Capital Company is seeking to start a new line of beer, a maple bacon beer. The company is going to have to purchase two pieces of machinery, a special fermenting barrel and a bacon maple extraction machine. Both machines together cost $1, 500,000. The machines are considered 7-year assets. Please see appendix 1 for the MACRS tables. The company is expecting the project to last 5 years, i.e. the maple/bacon beer fad is expected to be over at that time. The company expects to sell the machinery for $100,000 at the end of year 5. Now for the operations part of the equation, the company is expected to sell $500,000 of beer in the first year, and sales are expected to increase by 10% per year through year 5. The variable costs are 20% of sales, and fixed costs are $50,000 in year one, increasing at 5% per year. The company will close this project down at the end of year five. The company's discount rate is 12%. The corporate tax rate is 40% B) The same company, ABC Beer Capital Company is currently using certain equipment it can repurpose for a cost of S100,000 and create a unique IPA. The additional costs can be expensed in the first year, so no depreciation is required. The company expects sales of $150,000 per year for the next 5 years. The variable costs are 40% and the fixed costs are $25,000 per year. At the end of the five years, the company can sell the repurposed equipment for $20,000, which would be considered 100% gain. Again, the company's discount rate is 12%. The corporate tax rate is 40%.

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