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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…
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