Greenworld Textbooks Inc. is considering launching an online textbook business. It has hired you (the top 3530 student) at a fee of $5,000 to assess…

Greenworld Textbooks Inc. is considering launching an online textbook business. It has hired you (the top 3530 student) at a fee of $5,000 to assess the viability of the project. Your fee will be paid as soon as you deliver the report. You estimate an initial outlay of $100,000 in new computer equipment required for the project. The equipment will be deprecated straight-line over five years to an expected salvage value of $10,000. You also estimate that the project will bring in $45,000 in annual revenues from commissions on the online textbook sales. However, the project will result in an increase in computer servicing fees of $15,000 each year. The company’s accounting department will allocate an additional $10,000 each year in existing building maintenance fees to the project. As well, an additional investment in working capital of $8,000 will be required at the beginning of the project, but will be fully recovered at the end of Year 5. Greenworld Textbooks Inc. has a 35% tax rate and an 8 percent cost of capital. The firm already spent $12,000 last year in research expenses on the project.a) Should Greenworld Inc. go ahead with the online textbook project? (Ignore the half-year rule for part a). (10 marks)b) Will the project decision change, if the new computer equipment required in year 0 falls into a 20% declining balance asset class (and the half-year rule applies)? All of the cash flows remain the same. (10 marks)

a)YEARINITIAL OUTLAYworking capital investmentOPERATING FLOWSREVENUESlesscomputer serviving feesAccounting dept. allocationDepreciationEARNINGS BEFORE TAXtaxEARNINGS AFTER TAXAdd…

Order the answer to view it

Assignment Solutions
Assignment Solutions