Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.9 million. The marketing department predicts that sales related to the project will be $2.35 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Given the massive initial investment, Howell needs to reduce net working capital by $150,000 immediately. The only increase in NWC will occur at time t=2. At this time, NWC will be increased by $70,000. Any net working capital change will be recovered in full at the end of the projects life. The corporate tax rate is 35 percent. The required rate of return for Howell is 13 percent.

Compute the Operating Cash Flows for the Howell Petroleum company for Year (1) through (4). Show work.

A. Calculate the book value of the machine at the end of the projects life and the after tax salvage value.

B. Does the firm face any Opportunity cost from investing? Explain your answer and show the calculations, if necessary.

C. Construct the Total Cash Flows of Investment for Year (0) through (4). Use all the information you have on the initial investment and the subsequent investments in NWC. Note: I am not asking for the project's total cash flows in this question, so do not report the OCF calculations.

D. Should the project be accepted or rejected? Calculate the NPV of the project and motivate your answer.

Please my work and answer questions A, B, C, D!

Answer to the question Cost of Equipment $3.90 Million Life of Equipment 4 years Salvage Value NIL Depreciation per year $ 0.975 Million Particulars Amount in $ Millions Net Revenue per year 2.3500 Cost of goods sold @25% of sales 0.5875 Contribution per year 1.7625 Less: Depreciation 0.9750 EBIT 0.7875 Less: Tax @35% 0.2756 Earning after Tax (EAT) 0.5119 Add: Depreciation 0.9750 Free Cash flow per year 1.4869 Operating cash flow = EBIT * (1-tax) + Depreciation Hence use of change in working capial as well as discount rate as given is not be come in calculating operating cash flow. Hence operating cash flow for year 1 to year 4 = $1.4869 Millions Answer to the question Cost of Equipment $3.90 Million Life of Equipment 4 years Salvage Value NIL Depreciation per year $ 0.975 Million Particulars Amount in $ Millions Net Revenue per year 2.3500 Cost of goods sold @25% of sales 0.5875 Contribution per year 1.7625 Less: Depreciation 0.9750 EBIT 0.7875 Less: Tax @35% 0.2756 Earning after Tax (EAT) 0.5119 Add: Depreciation 0.9750 Free Cash flow per year 1.4869 Operating cash flow = EBIT * (1-tax) + Depreciation Hence use of change in working capial as well as discount rate as given is not be come in calculating operating cash flow. Hence operating cash flow for year 1 to year 4 = $1.4869 Millions