Question
The Mars Company is considering a major expansion of its business. The details of the proposed expansion project are summarized below: a) The company will
The Mars Company is considering a major expansion of its business. The details of the proposed expansion project are summarized below:
a) The company will have to purchase $500,000 in equipment at t=0. This is the depreciable cost
b) The project has an economic life of four years
c) Annual depreciation will be 165,000, 225,000, 75,000, 35,000 for years 1 through 4, respectively
d) At the end of four years, the company will sell the fixed assets at a salvage value of $100,000
e) the company forecasts that the project will generate $800,000 in sales the first two years (t=1 and 2) and $500,000 in sales during the last two years (t=3 and 4).
f) Each year the project's operating costs excluding depreciation are expected to be 60% of sales revenue.
g) The company's tax rate is 40%
h) Te project's cost of capital is 10%
What is the NPV of the project? Should the firm accept this project?
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