Question
After paying $3 million for a feasibility study, Stanley wrote a proposal with the following cash flow estimates for a 25-year capital project. Equipment cost:
After paying $3 million for a feasibility study, Stanley wrote a proposal with the following cash flow estimates for a 25-year capital project. Equipment cost: $34 million, Shipping costs: $1 million, Installation: $19 million, Salvage: $4, Working capital investment: $2 million, Revenues are expected to increase by $20 million per year and cash operating expenses by $9 million per year. The firms marginal tax rate is 40 percent, its weighted average cost of capital is 9%, and the firm requires a 3 year payback. Assume straight line depreciation.
Evaluate the project using NPV, IRR, PI, and PB. Show formulas used.
Answers below-
IO = $56 million
D = $2.16 million
NCF1-25 = $7.464 million
NCF25 = $4.4 million
NPV = $17.83 million > 0, so Accept
IRR = 12.75% > 9%, so Accept
PI = 1.32 > 1, so Accept
PB = 7.57 years > 3 so Reject
ACCEPT the project
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