Project NPV.

You are the CFO of a firm. Your analyst presents you with a project proposal for you to review. The project needs an upfront investment for fixed asset of $200,000. It also needs immediate working capital of $20,000. The project is projected to produce a first year revenue of $50,000, and this revenue is expected to grow by 10% each year for the life of the project. The cash cost of the project is $20,000 for the first year, and it is expected to grow by 5% each year for the life of the project. The project is expected to last 8 years. You decided to follow a 7-year MACRS to depreciate your fixed asset. You projected that the fixed asset is going to have a salvage value of $25,000 at the end of the project. Working capital need is going to stay at $20,000 for each year, and at the end you will be able to recover this capital. You have a flat corporate tax rate of 15%. Your firm is public and all equity. You need to use your firms required rate of return to evaluate the project. Right now, the expected market risk premium is 10%, risk-free rate is 3%, and your firm stock beta is 1.8.

1. Whats your firms required rate of return according to CAPM?

2. Build your cash flow table and find the cash flows from assets.

3. Calculate the NPV of the project. Should you take it?

Note: you can find 7-year MACRS schedule online (Wikipedia, for example). Pay special attention to the salvage value.