Question
banana publishing company is considering entering a new line of business. In analyzing the potential business, their financial staff has accumulated the following information. The
banana publishing company is considering entering a new line of business. In analyzing the potential business, their financial staff has accumulated the following information. The new business will require a capital expenditure of $2.5 million at t=0. This equipment will be depreciated according to the MACRS 3 year class life. The equipment will have a market value of $800,000 after three years. If Banana Publishing goes ahead with the new business, inventories will rise by $300,000 and accounts payable will rise by $200,000.
The new business is expected to have an economic life of three years. The business is expected to generate sales of $5 million at t = 1, $6 million at t = 2, $5.6 million at t = 3. Each year, operating costs excluding depreciation are expected to be 75% of sales. The company's tax rate is 40%. The company's weighted average cost of Capital is 11%. MACRS 3 year class life: Year 1: 33% Year 2: 45% Year 3: 15% Year 4: 7% WHAT IS THE EXPECTED NET PRESENT VALUE (NPV) OF THE NEW BUSINESS? A. 667,817 B. 729,677 C. 504,282 D. 687,951 E. 459,886
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