Question
Medavoy Co. is considering a new project that complements its existing business. The machine required for the project costs $3.7 million. The marketing department predicts
Medavoy Co. is considering a new project that complements its existing business. The machine required for the project costs $3.7 million. The marketing department predicts that sales related to the project will be $2.65 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated 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 40 percent of sales. The company also needs to add net working capital of $175,000 immediately. The additional net working capital will be recovered in full at the end of the projects life. The corporate tax rate is 25 percent and the required return for the project is 13 percent. Should the company proceed with the project?
Please provide calculations.
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