The following relates to a potential capital investment project: Initial investment in working capital = $25,000 Initial
Question:
The following relates to a potential capital investment project:
Initial investment in working capital = $25,000
Initial investment in equipment = $160,000
Estimated annual sales = $150,000
Estimated annual cash expenses related to operations = $65,000
The equipment needed for the project has a 4-year useful life with $0 salvage value. The working capital will be released at the end of the project.The company has a 30% tax rate. A 17% discount rate is to be used to evaluate the project.
a) What is the project's net present value (NPV)?
b) What is the project's profitability index (assume that working capital needs are part of the initial investment required)? (Round to 3 decimal places XX.XXX)
c) Should the company accept the project? Why or why not?
Valuation The Art and Science of Corporate Investment Decisions
ISBN: 978-0133479522
3rd edition
Authors: Sheridan Titman, John D. Martin