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McDermott Technologies is evaluating a new project that requires $800,000 in new equipment. McDermott estimates that the new project will generate $900,000 in annual sales at the end of each of the next four years and that operating costs (excluding depreciation) will equal $400,000. Suppose the firm depreciates the equipment using the straight-line method over four years and the firm's tax rate is 40%.
Question 1: The project's WACC is 9.8%, and the present value of the project's OCFs is?
QUESTION 2: Suppose that McDermott uses Modified Accelerated Cost Recovery System (MACRS) depreciation rates instead. The applicable rates are 33%, 45%, 15% and 7%, respectively. Recalculate the firm's OCFs and find their present value now (still assuming a WACC of 9.8%).
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