Question
Dent Enterprises (DE), a US-based medical research firm, has recently identified an island off the northeastern coast of Canada that it believes contains a large
Dent Enterprises (DE), a US-based medical research firm, has recently identified an island off the northeastern coast of Canada that it believes contains a large population of special spiders. The venom from these spiders will be used to fight a specific type of cancer that is unique to Europe. The owners of the island have offered to sell it to DE for USD 8 million. DE would also be faced with additional initial costs of USD 12 million to engineer the equipment that will extract the venom from the spiders. DE is an environmentally aware firm and has agreed to return the spiders to the island.
The spider population would provide enough venom to last for three years. The following information has been made available to DE:
Year | One | Two | Three |
Revenues | USD 26 million | USD 28 million | USD 29 million |
Operating Expenses (excluding depreciation) | USD 12 million | USD 15 million | USD 18 million
|
Depreciation Expense | USD 6 million | USD 2 million |
|
Interest Expense | USD 1 million | USD 1 million | USD 1 million |
Tax Rate | 21% | 21% | 21% |
Dent Enterprises has a required return on assets of 10.2%. DE will invest USD 2 million at the end year during the life of the project to plant spider friendly bushes and flowers, as well as construct a bird sanctuary on the south side of the island. DE expects to sell the island at the end of year 3 for USD 4 million.
Compute the projects NPV.
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