Question 7:

Consider a project to supply postage stamps to the U.S. Postal Service for the next 5 years. You have an unused parcel of land available that cost $760,000 five years ago; if the land were sold today, it would net you $912,000, aftertax. The land can be sold for $1,500,000 after taxes in 5 years. You will need to invest $1,000,000 in a new manufacturing plank and $350,000 in equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's 5-year life. The equipment can be sold for $456,000 after taxes at the end of the project. At the beginning of the project, inventory will increase by $450,000, accounts receivable will increase by $50,000, and account payable will increase by $31,000. All net working capital will be recovered when the project ends. The project is expected to generate operating cash flows of $330,000 a year for the 5 years. If the company uses a WACC of 10%, what is the NPV of the project?