Question
A new project is expected to generate $5 million annual sales for each of the next four years. Annual operating costs excluding depreciation are $2
A new project is expected to generate $5 million annual sales for each of the next four years. Annual operating costs excluding depreciation are $2 million. The new project requires an initial $8 million equipment investment. The equipment will be depreciated on a straight-line basis over its four year economic life. At the project's end, the equipment has no salvage value. The new project also requires an additional $125,000 in inventories, which will be funded partly with an additional $75,000 in accounts payable. The change in net operating working capital will be fully recovered at the end of the project's life. The corporate tax rate is 40% and the firm's overall corporate WACC is 11%. What are the initial investment and year 3 cash flows (those that occur in years 0 and 3), respectively?
A. -$8.05 million, $2.15 million | |
B. -$8.05 million, $2.6 million | |
C. -$7.95 million, $2.25 million | |
D. -$7.95 million, $2.6 million |
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