Question
Suppose you are facing the follwoing capital budgeting proposal: $100,000 inital cost, to be depreciated straight-line over 5 years to an expected salvage value of
Suppose you are facing the follwoing capital budgeting proposal: $100,000 inital cost, to be depreciated straight-line over 5 years to an expected salvage value of $ 5000, 35% tax rate, $45,000 additional revenues for the first year,and it is growing at a rate of 5% till the project ends. The expenses include both variable and fixed costs. The variable cost is 40% of the revenue, while the fixed cost is $8000 annually. Working capital is 20% of the following year's revenue. Assuming the cost of capital is 11%, complete the following worksheet first, then determine whether or not the project should be approved based on NPV method. How much your NPV is going to increase/decrease if variable cost goes up to 50%?
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