Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 8 5 pts One that your company is considering a new project and has collected the following information about the project. (Note: You

image text in transcribed

Question 8 5 pts One that your company is considering a new project and has collected the following information about the project. (Note: You may or may not need to use all of this information. use only the information that is relevant.) The project has an anticipated economic life of 4 years. The company will have to purchase a new machine. The machine will have an up-front cost of $2 million at Year O. The machine will be depreciated on a straight-line basis over 4 years (that is, depreciation expense will be $500,000 in each of Years 1-4). The company anticipates that the machine will last for four years, and that after four years, its salvage value will equal zero. If the company goes ahead with the proposed product, it will have an effect on the company's net operating working capital. At the outset, Year O, inventory will increase by $140,000 and accounts payable will increase by $40,000. At Year 4, the net operating working capital will be recovered after the project is completed. The project is expected to generate sales revenue of $2 million in Year 1, $3 million in Years 2 and 3, and $2 million in Year 4. Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue. The company's interest expense each year will be $100,000. The new project is expected to reduce the after-tax cash flows of the company's existing products by $250,000 a year (Years 1-4). The company's overall WACC is 10 percent. However, the proposed project is riskier than the average project and the project's WACC is estimated to be 12.5 percent. The company's tax rate is 40 percent. Given this information, determine the net present value of the proposed project. Answer in dollar and cents, with no punctuation. For example, if your answer is $59,255.48, enter "59255.48".

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets and Institutions

Authors: Anthony Saunders, Marcia Cornett

6th edition

9780077641849, 77861663, 77641841, 978-0077861667

More Books

Students also viewed these Finance questions

Question

What is a process and process table?

Answered: 1 week ago

Question

What is Industrial Economics and Theory of Firm?

Answered: 1 week ago

Question

What is the meaning and definition of E-Business?

Answered: 1 week ago