Question
Flemish Corp. is looking to invest in a new project that requires an initial investment of $100,000 in equipment. This equipment falls in the 3-year
Flemish Corp. is looking to invest in a new project that requires an initial investment of $100,000 in equipment. This equipment falls in the 3-year MACRS class for depreciation purposes. In addition to the initial investment, Flemish expects an initial increase in its net working capital of $5,000 and annually recurring net working capital need of $900, which will all be recovered at the end of the project. The project is expected to generate incremental net revenues of $150,000 per year, but it will also impose a cannibalization cost on expertise used in another project to the tune of $15,000. These revenues are net of all costs except depreciation, interest, and taxes. The firm expects to sell the project at the end of two years at a salvage value of $25,000. The cost of capital for the project is 12%, and the tax rate for the firm is 40%. Should Flemish invest in the project?
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