Question
Suppose a firm is considering the following project, where all of the dollar figures are in thousands of dollars. In year 0, the project requires
Suppose a firm is considering the following project, where all of the dollar figures are in thousands of dollars. In year 0, the project requires K15, 350 investments in plant and equipment, is depreciated using the straight-line method over seven years, and there is a salvage value of K1, 500 in year 8. The project is forecast to generate sales of 2,500 units in year 1, rising to 8,300 units in year 5, declining to 1,800 units in year 7, and dropping to zero in year 8. The inflation rate is forecast to be 2.5% in year 1, rising to 4.0% in year 5, and then leveling off. The real cost of capital is forecast to be 11.0% in year 1, rising to 12.2% in year 7. The tax rate is forecast to be a constant 35.0%. Sales revenue per unit is forecast to be K10.70 in year 1 and then grow with inflation. Variable cost per unit is forecast to be K6.40 in year 1 and then grow with inflation. Cash fixed costs are forecast to be K7, 280 in year 1 and then grow with inflation. What is the project NPV?
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