Question
A firm producing computers considers a new investment which is about opening a new plant. The projects lifetime is estimated as 5 years and requires
A firm producing computers considers a new investment which is about opening a new plant. The projects lifetime is estimated as 5 years and requires 15 million $ as investment cost. Salvage value of the project is estimated as 2 million $ ( which will be received in the sixth year ). However firm prefers to show salvage value only as 1 million $. Firm uses 5 year straight line depreciation. It is estimated that the sales will be 8 million $ next year and then sales will grow by 10% each year. It is estimated that fixed costs will be 1.5 million $ next year and then will grow by 5% each year. Variable costs are projected 15% of sales each year. This particular project, in addition, requires a working capital of 1.5 million $ in the first year, 2.5 million $ in the second year, 3 million $ in the third year , 2 million $ in the fourth year and 1 million $ in the fifth year. Firm plans to finance the 10 million $ of the project by a loan with an interest cost of 15% before tax and the rest by equity. Corporate tax rate is 20%. Beta of the firm is 1.25, risk free rate is 10% and the market risk premium is 5%. Given this information, find the net PV of the project; is this project feasible or not ?
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