Sovrano Caf is considering a major expansion of its business. The details of the proposed expansion project are summarized below:

o The company will have to purchase $900,000 equipment, that require installation cost and transportation cost equal $100,000.

o The sources of fund will be 250,000 loan from bank at interest 8% and the remaining will be from equity.

o The company will pay interest equal to $120,000 each year.

o The project has an economic life of 4 years. o The cost can be depreciated using straight line method.

o At t = 0, the project requires that increase Account receivable by $80,000 and inventory by $120,000 while Account payable will increase by $160,000.

o The projects salvage value at the end of 4 years is expected to be Zero.

o The company forecasts that the project will generate $725,000 in sales the first 2 years and $650,000 in sales during the last 2 years

o Each year the projects operating cost excluding depreciation is expected to be 50% of sales revenue.

o The companys tax rate is 40%

o The bond yield premium in Egypt was 18% at that time

o The company already pays marketing expenses equal 80,000.

o The government treasury bond earn interest equal to 5%

Requirements:

1. Using the Net present value, what do you recommend?