Problem:

You are considering investing in a new plant to produce Widgets. You expect that the plant will require an initial investment of $4,200,0000 and can be depreciated for tax purposes over 40 years to a scrap value of $200,000. You anticipate financing this investment from internal funds. You expect to be able to sell about 700,000 widgets in the first year, at a price of $6.50 per widget. The unit cost of production is $5 per widget (excluding depreciation). Furthermore, you expect no changes in the price, costs, or sales volume throughout the 40 year period. After 40 years you expect to be able to sell the plant for $600,000. The firm is subject to a 20% tax rate on corporate earnings and on capital gains, which is expected to continue into the foreseeable future.

Requirement:

Question 1: Using a straight line depreciation schedule, what will be the depreciation per year.

Question 2: Draw a time line representing the Cash Flow from this investment for years 0, 1, and 40 assuming the firm continues this straight line depreciation

Question 3: Find the NPV of this investment if the cost of capital is 20%

Question 4: If the firm financed this investment with perpetual debt at an interest rate of 7%, what is the present value of the tax shield on the debt? Explain fully.

Question 5: Suppose the government suddenly announces that you can depreciate this plant over 35 years rather than 40 years. Would the NPV of this project increase or decrease, and why? You do not have to calculate the amount of the change, just tell me the direction and why.

Note: Please show guided help with steps and answer.