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The Hoskie Tech Corp. is considering expanding it highly technical construction facilities. The construction will take a total of 4 years until it is completed
- The Hoskie Tech Corp. is considering expanding it highly technical construction facilities. The construction will take a total of 4 years until it is completed and ready for operation. The following data and assumptions describe the proposed expansion:
- To make this expansion feasible, R&D expenditures of $175,000 must be made immediately to ensure that the construction facilities are competitively efficient ( = 0)
- By the end of the first year the land will be purchased and construction on stage 1 of the facilities will begin, involving a cash outflow of $100,000 for the; land and $300,000 for the construction facilities.
- Stage 2 of the construction will involve a $250,000 cash outflow at the end of year 2.
- At the end of year 3, when production begins, inventory will be increased by $50,000.
- The first sales from operation of the new plant will occur at the end of year 4 and be $850,000 and continue art heat level for 10 years (with the final flow from sales occurring at the end of year 13).
- Operating costs on these sales are composed of $100,000 fixed operating costs per year and variable operating costs of equal to 45% of sales.
- The construction facilities will be depreciated using the simplified straight-line method over their 10-year life down to zero. When the plant is closed it will be sold for $50,000. (Note: Assume the investment in the plant ins depreciated using the simplified straight-line meth from $550,000 down to zero over its 10-year life during years = 4 through 13.) DO NOT depreciate the land.
- When the plant is closed, the land will be sold for $225,000 ( = 13).
- The company is in the 34% marginal tax bracket.
Given a 12% RRR, what is the NPV of this project? Should it be accepted?
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