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1. FAG Inc., is considering an expansion project that requires an initial fixed asset investment of $4.2 million. The fixed asset will be depreciated straight-line
1. FAG Inc., is considering an expansion project that requires an initial fixed asset investment of $4.2 million. The fixed asset will be depreciated straight-line to zero over its three-year life, after which time it will be worthless. The project also requires an initial investment in net working capital (NWC) of $420,000. The project is estimated to generate $3,500,000 in annual sales, with costs of $1,680,000. Suppose the tax rate is 20 percent and the required return is 10 percent.
- Determine the OCF for the expansion project. (3 marks)
- What is the projects Year 0 net cash flow? Year 1? Year 2? Year 3? (8 marks)
- What is the projects NPV? Should the project be accepted? Explain. (4 marks)
1. FAG Inc., is considering an expansion project that requires an initial fixed asset investment of $4.2 million. The fixed asset will be depreciated straight-line to zero over its three-year life, after which time it will be worthless. The project also requires an initial investment in net working capital (NWC) of $420,000. The project is estimated to generate $3,500,000 in annual sales, with costs of $1,680,000. Suppose the tax rate is 20 percent and the required return is 10 percent.
- Determine the OCF for the expansion project. (3 marks)
- What is the projects Year 0 net cash flow? Year 1? Year 2? Year 3? (8 marks)
- What is the projects NPV? Should the project be accepted? Explain. (4 marks)
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