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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
Aptec, Inc., is negotiating with the U.S. Department of Housing and Urban Development (HUD) to open a manufacturing plant in South Central L.A., the scene of much of the rioting in April 1992. The proposed plant will cost $3.5 million and is projected to generate annual after-tax profits of $550,000 million over its estimated four-year life. Depreciation is straight-line over the four-year period and Aptec’s tax rate is 35 percent. However, given the risks involved, Aptec is looking for a tax-exempt government subsidy. According to Aptec, the subsidy must be able to achieve any of the following four objectives:
(1) Provide a 2-year payback.
(2) Provide an accounting rate of return of 35 percent.
(3) Raise the plant’s IRR to 22 percent.
(4) Provide an NPV of $1 million when cash flows are discounted at 18 percent.
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a. For each alternative suggested by Aptec, develop a subsidy plan that minimizes the costs to HUD of achieving Aptec’s objective. You can schedule the subsidy payments at any time over the four-year period.
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b. Which of the four subsidy plans would you recommend to HUD if it uses a 15 percent discount rate ?
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