Question
Youre considering starting a mask production business. You have spent $10,000 researching existing businesses and have concluded that the project is highly risky, due to
Youre considering starting a mask production business. You have spent $10,000 researching existing businesses and have concluded that the project is highly risky, due to the uncertain length of the current pandemic and futured policy interventions. The business warrants a discount rate of 11%, will last for three years, and your tax rate is 25%. If you take the project you will be costing yourself approximately $40,000 per year in after-tax wages for the three years the business is in operation.
You expect to be able to produce 100,000 masks per year, with the first production batch to arrive two years from today. You estimate that the price of masks for that first batch, arriving two years from today, will be $5 per mask. You also expect to sell a second 100,000-unit batch three years from today for $3 per mask. For both batches you expect operating costs to be $200,000 (i.e., $2 per mask). After which you expect to end the project.
To start the project, you must make an immediate $200,000 capital expenditure, which you can depreciate in a straight line over 5 years. You expect to sell the asset in three years for $120,000. The project also requires a working capital expenditure of $45,000 incurred one year from today and recovered at the end of the three-year project.
Calculate the NPV of the project. should you accept the project? Show all work.
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