For the purpose of investment appraisal, ABC LTD uses a market risk premium of 6% and

risk-free rate of 2%. Its historical beta is 0.9 and marginal tax rate is 25%. ABC LTD

has a target debt ratio of 20%.

ABC LTD plans to expand. The initial capital expenditure required

for this expansion is estimated to be $4 million, which is to be depreciated equally over four

years to zero net book value with no salvage value.

Based on a study which cost $200,000 to undertake, it anticipates that sales

will be $400,000, $600,000 and $750,000 for the first three years. Thereafter, it will grow at

3% per year indefinitely.

Gross profit will be 60% of sales. Fixed overheads in the first three years is estimated to be

$85,000 per year and this will increase to $225,000 from year five onwards. Net working

capital is estimated to be 15% of sales, which is required at the start of the year.

The net working capital will be fully recovered at the end of year four.

What is the Net Present Value of this investment?