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The new business will require the company to purchase additional fixed assets that will cost $600,000 at t = 0. For tax and accounting purposes,
The new business will require the company to purchase additional fixed assets that will cost $600,000 at t = 0. For tax and accounting purposes, these costs will be depreciated on a straight-line basis over three years.
At the end of three years, the company will get out of the business and will sell the fixed assets at a salvage value of $100,000.
The project will require a $50,000 increase in net operating working capital at t = 0.
The companys marginal tax rate is 35 percent.
The new business is expected to generate $2 million in sales each year (at t = 1, 2, and 3). The operating costs excluding depreciation are expected to be $1.4 million per year.
The projects cost of capital is 12 percent.
What is the projects net present value (NPV)? (5 points)
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