Question
and it would cost another $30,000 to modify the equipment for special use by the firm. The equipment will be depreciated to zero value over
and it would cost another $30,000 to modify the equipment for special use by the firm.
The equipment will be depreciated to zero value over the 3 years using prime cost (straight line) method.The machine would be sold after 3 years for $60,000.The machine would require a $8,500 increase in net working capital and fully recover at the end of its 3-year life.The equipment should save the firm $50,000 per year in before-tax labor costs.
Below shows the forecasted sales revenues, variable cost and fixed cost.
Year 1
Year 2
Year 3
Sales quantity (units)
4,000
5,000
5,500
Selling price per unit
$4
$4
$4
Fixed cost of production (per year)
$1,500
$1,500
$1,500
Variable cost of production (per unit)
$1.1
$1.1
$1.1
The marginal tax rate is 40% and the discount rate is 10%.
i.What is the net present value (NPV) of the proposed project?
ii. Advise should the project be accepted based on your answer in part (i)?
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