Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

5 . ( Worth 2 0 points ) A petroleum company is considering a new project that complements its existing business. The machine required for

5.(Worth 20 points) A petroleum company is considering a new project that complements its existing business. The machine required for the project costs $2 million. The marketing department predicts that sales related to the project will be $1.2 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its five-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25% of sales. After four years the machine can be sold for $150,000. The petroleum company also needs to add net working capital of $100,000 in Year 0 when it acquires the machine. The additional net working capital will be recovered in full at the end of the projects life as opposed to the machine economic life. The corporation tax rate is 35%. The required rate of return for the petroleum company is 15%. Compute the NPV. Compute the internal rate of return. Compute the profitability index. Should the petroleum company proceed with the project? Your worksheet must follow this format:\table[[,,,,,,],[,,,,,,],[,,,,,,],[Free Cash Flow,,,,,,],[,,,,,,]]
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Port Infrastructure Finance

Authors: Hilde Meersman, Eddy Van De Voorde, Thierry Vanelslander

1st Edition

0415720060, 978-0415720069

More Books

Students also viewed these Finance questions

Question

Explain what is meant by the terms unitarism and pluralism.

Answered: 1 week ago