Development cost

Capital investment

Project life

Sales

Material cost

cost increase

Material quantity

Tax rate

cost of capital

NPV

FCF

Year $--012345$

Question $4$: Capital Budgeting

Your company is deciding whether to invest in a project which uses a new material in one of your

existing products. $$4$ million had been spent in developing this new material. The project will cost

$$50$ million initially, have a life of $5$ years, and generate sales of $$20$ million each year during its

life. Each year you need $20,000$ kgs of the new material, which costs now $$250$ per kg to produce.

The cost of producing the new material will increase by $5\%$ per year. The cost of capital is $10\%$

for this business. The tax rate is $35\%.$ The capital investment can be depreciated linearly over the

life of the project. What is the NPV of the project?