ABC Corporation is considering an expansion project. The proposed project has the following features:

• The project has an initial cost of $2,000,000 (machine: $1,800,000, insurance: $40,000, shipping $60,000, modification: $100,000) --this is also the amount which can be depreciated using the following 3 year MACRS depreciation schedule:

Year Depreciation Rate

1 33%

2 45

3 15

4 7

• The sales price is expected to increase by 3 percent per year due to inflation.
• The variable cost is expected to increase by 4 percent per year.
• The fixed cost will be $50,000 per year for the next four years. (No fixed cost increase)
• Number of units sold will grow by 10 percent every year.
• If the project is undertaken, net working capital would have to increase by an amount equal to 10% of sales revenues. This net operating working capital will be recovered at the end of the projects life (t = 4). (You must consider an inflation effect.)
• If the project is undertaken, the company will sell additional 200,000 units in year one (t = 1). Unit price at the end of the Year 1 is $12.
• Unit price is $12 and variable unit cost is $5 at the end of the Year 1.
• The companys tax rate is 40 percent.
• The company has no debt.
• At the end of Year 4, the projects economic life is complete, but the company can sell the machine at $20,000 (market value of salvage).
• The projects WACC = 10 percent.

What is the projects net present value (NPV)?