Question

Philips expects to invest $30,000,000 in new/plant equipment. The contract will last for 10 years, at which point it expects its plant equipment to have a

salvage value of $8,000,000. They plan to finance this project using 75% debt and 25% equity. Their investment banker advises there are transaction costs
of 2.5% on debt and 10.5% on equity. Phillips expects to increase its accounts receivable by $9,000,000, its inventory by $1,000,000, and its accounts
payable by $6,000,000. It expects to sell 42,000 units at a price of $310/unit, with variable cost per unit of $195. It expects additional operating costs each
year of $900,000. Phillips tax rate is 21 %.

What is the annual depreciation for the fixed assets of this project?

Answer 1

The annual depreciation for the fixed assets of this project is $3,000,000.

Step-by-step explanation:

Annual Depreciation for Fixed Assets

To calculate the annual depreciation for the fixed assets, we need to know the expected useful life of the assets and the method of depreciation being used. Let's assume that the plant equipment has an expected useful life of 10 years and is being depreciated using the straight-line method.

The formula for straight-line depreciation is:

Annual Depreciation Expense = (Initial Cost - Salvage Value) / Useful Life

Given that Philips expects to invest $30,000,000 in new plant equipment and the contract will last for 10 years, we can calculate the annual depreciation as follows:

Annual Depreciation Expense = ($30,000,000 - $0) / 10 = $3,000,000

Therefore, the annual depreciation for the fixed assets of this project is $3,000,000.