Question
NPV Holiday Co. wants to sell a new product. The company has been considering this idea for a while now and spent $300,000 in R&D.
NPV
Holiday Co. wants to sell a new product. The company has been considering this idea for a while now and spent $300,000 in R&D. They have also ordered a marketing analysis from a consulting firm, for which they have paid 50% of the $80,000 contract. The balance will be paid next week.
The new product will require an investment in a new equipment of $750K and an increase in net working capital of $75K. The project will last 7 years. Half of the change in net working capital will be recovered in year 6 and the rest the in the last year.
The equipment will be sold for $150K when the project ends. The project will generate annual sales of $300K with $130K of operating expenses. Holiday Co. has a tax rate of 35%, a WACC of 9% and a CCA depreciation rate of 30%.
Calculate the NPV of this project for Holiday Co.
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