Mills Mining is considering an expansion project. To date they have spent $75,000 investigating the viability of the project and have decided to proceed. The proposed project will cost $500,000 in addition to the $75,000 that was spent on the feasibility study. The project will be depreciated over a 3 year MACRS class life.

MACRS

Depreciation

Year Rates

1 0.33

2 0.45

3 0.15

4 0.07

If the project is undertaken the company will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. The company will realize an additional $600,000 in sales over each of the next three years. The companys operating costs (not including depreciation) will increase by $400,000 a year. The companys tax rate is 40%. At t = 3, the projects economic life is complete, but it will have a salvage value (before-tax) of $50,000 after three years. The projects WACC is 10%.

a) What is the projects net present value (NPV)? What is the IRR?

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