6. After spending $500,000 to study the potential market for a new specialty chemical, Hart Industries is considering a new plant requiring an initial investment in new construction and equipment. (Problem 6 is worth 27 points total)

The company will purchase $6,000,000 in new plant and equipment. The IRS will allow Hart to depreciate the

plant and equipment to a salvage value of zero on straight-line basis over a six-year useful life.

At the end of five years they expect to be able to sell the plant and equipment for $2,000,000.

The firm estimates revenue as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 $26M $26M $26M $26M $26 M

Variable costs will be 70% of revenue.

Fixed costs for the project are estimated to be $4,000,000 annually.

Initial (Year 0) net working capital (NWC) requirements for the project are expected to be $700,000. In addition,

the company will increase required working capital $50,000 each year. At the end of the five-year project the net working capital will no longer be required (NWC will go to $0 in Year 5).

The companys tax rate is 30%.

What are Harts cash flows from assets for the 5 years of the project?

If your required return is 10%, what is the projects NPV and IRR?

Should the company accept the project? Why or why not?