Alternatively, two proposals have been made for state expenditures of these funds.Ĥ. One alternative is to give Glottamorans a one-time tax rebate. The state of Glottamora has $100 million remaining in its budget for the current year. He estimates that incremental returns (additional ticket revenues less the superstar’s salary) would be as follows over the four-year period:ĩ. The general manager figuresthat attendance, and hence revenues, would increase substantially if the Bobcats obtained the superstar. Being somewhat old, the basketball player is expected to be able to play for only four more years. The Bobcats would have to pay the other team $800,000 to obtain the superstar. The general manager of the Bobcats wants to analyze the offer as a capital budgeting problem.
#SUPPOSE FOR THE PAST 8 YEARS THE FIRM HAS BEEN PRODUCING QD UNITS PER PERIOD USING PLANT SIZE ATC4 PROFESSIONAL#
The Charlotte Bobcats, a professional basketball team, has been offered the opportunity to purchase the contract of an aging superstar basketball player from another team. Should the firm accept or reject the project?ĥ. Compute the internal rate of return and the net present value.ī. The firm’s cost of capital is 12 percent.Ī. The firm uses the straight-line depreciation method with a zero salvage value and has a (marginal) income tax rate of 40 percent. Net cash inflows (before depreciation and taxes) are expected to be $5,000 per year for five years. A firm has the opportunity to invest in a project having an initial outlay of $20,000.