Question
having trouble doing this problem in excel Howell Petroleum is considering a new project that complements its existing business. The machine required for the project
having trouble doing this problem in excel
Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $1.8 million. The marketing department predicts that sales related to the project will be $1.1 million for the next 4 years, after which the market will cease to exist. The machine will be depreciated using the 7 year MACRS schedule. Howell expects to be able to sell the equipment for $100,000 at the end of the project (at the end of year 4). Cost of goods sold (COGS) and operating expenses related to the project are expected to be $25,000 per year. Howell expects that they will require an additional $20,000 in net working capital over the life of the project. The addition to net working capital will be recovered at the end of the project. The tax rate is 35%. (a) Calculate the NPV of this project using a 13% required rate of return. Also compute the IRR and profitibility index. (b) Suppose the required return were 17%. What is the project NPV? (c) If the project were to require an additional $50,000 in net working capital (rather than $20,000), what would the NPV be (using 13% requred rate of return)? (d) Consider a low scenario, where sales are $800,000 per year. Assume COGS and operating expenses are $20,000 per year in this scenario. What is the project NPV (assuming a 13% required return)? (e) Consider a high scenario, where sales are $1.4 million per year. Assume COGS and operating expenses are $40,000 per year in this scenario. What is the project NPV? (f) At what level of sales does the project exactly break even in NPV (assuming a 13% required return)?
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