Capital budgeting The company is going to analyse a new investment project which has the following characteristics:

Unit price $5.00

Annual unit sales 40,000

Variable cost per unit $2.25

Investment into new machinery (t=0) $300,000

Investment in working capital $50,000 (fully recovered at the end of project)

Project life 6 years

Annual depreciation $40,000

Market value of machinery (t=6) 30,000

Tax rate 40 % (the same for profits and capital gains)

Required rate of return (WACC) 10 %

Marketing research expense $11,000 (the research was conducted earlier this year)

Questions:

Find the project cash flows (initial investment, operating cash flows each year and terminal cash flow)

Evaluate the project NPV

Should the company invest into such project? Explain.