1. What will be the tax depreciation each year? Note: the total deprecation of tax purposes will still be $350 million if your calculations are correct.
2. Create an after-tax cash flow timeline similar to the one you did in Project 4.
3. Calculate the new NPV and IRR. Should the Project be accepted? The CFO thinks that the likely NPV and IRR will be close to the numbers that you calculated in Project 4.
The following questions will be used to estimate risk. Please use Table 3 to calculate cash flow.
4. The controller is worried about tax increases and estimates that the tax rate with be raised to 50% (federal and Maryland state) in year 4. Also there is a concern that expenses are understated. He asks, “What would happen to the NPV calculation if the cash tax expenses come in 2% higher than estimated and the tax rate increases to 50% in year 4?” This will allow a subjective evaluation of the project risk. Calculate a new cash flow time line with cash expenses 10% higher than those in Table 2 and with a 50% tax rate. Use Table 3
5. What would be the net present value, NPV in this “worst case” cash flow? What will be the IRR?
6. Should the project be accepted? Discuss the risk and the reward to McCormick.