Question
A company is considering a capital project that will increase Sales Revenue by $2,000,000 per year. The project will also cause COGS Expense to rise
A company is considering a capital project that will increase Sales Revenue by $2,000,000 per year. The project will also cause COGS Expense to rise by $400,000 each year. In addition, Depreciation will go up by $150,000 per year, and Selling, General & Administrative Expenses will increase $550,000 per year. The companys marginal tax rate is 35%. What is the annual after-tax operating cash flow to be generated by the project? Assume the operating cash flows remain unchanged for 10 years. The project requires an initial investment of $1,500,000. Given a discount rate of 11%, what is the NPV? Should the company implement the project? Why or why not?
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