FINANCIAL MANAGEMENT

Question 1

Biru Bookstores is considering a major expansion of its business. The details of the proposed expansion project are summarized below:

The company will have to purchase RM400,000 in equipment at y=0.

The project will have an economic life of four years.

The cost can be depreciated on a MACRS 3-year basis, 33% in year 1, 45% in year 2, 15% in year 3 an 7% in year 4.

At y=0, the project requires inventories increase by RM40,000 and accounts payable increase by RM10,000. The change in Net Operating Working Capital is expected to be fully recovered at y=4.

Salvage value at year 4 is expected to be RM0

The company forecasts that the project will generate RM800,000 in sales the first 2 years (y=1 and 2) and RM500,000 in sales during the last two years (y=3 and 4).

Each year the projects operating costs excluding depreciation is expected to be 60% of sales revenue.

The company tax rate is 28%.

The projects cost of capital is 8%.

Required:

Calculate the project initial outlay

What is the NPV of the proposed project?

Should Biru Bookstores proceed with the project?