Suppose John White is hired as a consultant for firm A, manufacturers of aluminium. The market for aluminium is growing quickly. The company bought some land three years ago for $1.9 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.1 million on an after-tax basis. In four years, the land could be sold for $2.3 million after taxes. The company also hired a marketing firm to analyse the aluminium market, at a cost of $175 000. An excerpt of the marketing report is as follows:

The aluminium industry will have a rapid expansion in the next four years. With the brand name recognition that Firm A brings to bear, we feel that the company will be able to sell 5 100, 5 800, 6 400 and 4 700 units each year for the next four years, respectively. Again, capitalising on the name recognition of firm A, we feel that a premium price of $425 can be charged for each aluminium. Because aluminium appears to be a fad, we feel at the end of the four-year period, sales should be discontinued.

Firm A believes that fixed costs for the project will be $345 000 per year and variable costs are 15 per cent of sales. The equipment necessary for production will cost $2.65 million and will be depreciated on a straight-line basis over four years for tax purposes. At the end of the project, the equipment can be scrapped for $395 000. Net working capital of $125 000will be required immediately. Firm A has a tax rate of 30 per cent and the required return on the project is 13 per cent.

Required

What is the NPV of the project?

Suppose John White is hired as a consultant for firm A, manufacturers of aluminium. The market for aluminium is growing quickly. The company bought some land three years ago for $1.9 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.1 million on an after-tax basis. In four years, the land could be sold for $2.3 million after taxes. The company also hired a marketing firm to analyse the aluminium market, at a cost of $175 000. An excerpt of the marketing report is as follows:

The aluminium industry will have a rapid expansion in the next four years. With the brand name recognition that Firm A brings to bear, we feel that the company will be able to sell 5 100, 5 800, 6 400 and 4 700 units each year for the next four years, respectively. Again, capitalising on the name recognition of firm A, we feel that a premium price of $425 can be charged for each aluminium. Because aluminium appears to be a fad, we feel at the end of the four-year period, sales should be discontinued.

Firm A believes that fixed costs for the project will be $345 000 per year and variable costs are 15 per cent of sales. The equipment necessary for production will cost $2.65 million and will be depreciated on a straight-line basis over four years for tax purposes. At the end of the project, the equipment can be scrapped for $395 000. Net working capital of $125 000will be required immediately. Firm A has a tax rate of 30 per cent and the required return on the project is 13 per cent.

Required

What is the NPV of the project?