Assume that your company is considering a new project and has collected the following information about the project. (Note: You may or may not need to use all of this information, use only the information that is relevant.) The project has an anticipated economic life of 4 years. The company will have to purchase a new machine. The machine will have an up-front cost of $2 million at Year O. The machine will be depreciated on a straight-line basis over 4 years (that is, depreciation expense will be $500,000 in each of Years 1-4). The company anticipates that the machine will last for four years, and that after four years, its salvage value will equal zero. If the company goes ahead with the proposed product, it will have an effect on the company's net operating working capital. At the outset, Year 0, inventory will increase by $140,000 and accounts payable will increase by $40,000. At Year 4, the net operating working capital will be recovered after the project is completed. The project is expected to generate sales revenue of $2 million in Year 1, $3 million in Years 2 and 3, and $2 million in Year 4. Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue. The company's interest expense each year will be $100,000. The new project is expected to reduce the after-tax cash flows of the company's existing products by $250,000 a year (Years 1-4). The company's overall WACC is 10 percent. However, the proposed project is riskier than the average project and the project's WACC is estimated to be 11.5 percent. The company's tax rate is 40 percent. Given this information, determine the net present value of the proposed project.
Assume that your company is considering a new project and has collected the following information about the project. (Note: You may or may not need to use all of this information, use only the information that is relevant.) The project has an anticipated economic life of 4 years. The company will have to purchase a new machine. The machine will have an up-front cost of $2 million at Year O. The machine will be depreciated on a straight-line basis over 4 years (that is, depreciation expense will be $500,000 in each of Years 1-4). The company anticipates that the machine will last for four years, and that after four years, its salvage value will equal zero. If the company goes ahead with the proposed product, it will have an effect on the company's net operating working capital. At the outset, Year 0, inventory will increase by $140,000 and accounts payable will increase by $40,000. At Year 4, the net operating working capital will be recovered after the project is completed. The project is expected to generate sales revenue of $2 million in Year 1, $3 million in Years 2 and 3, and $2 million in Year 4. Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue. The company's interest expense each year will be $100,000. The new project is expected to reduce the after-tax cash flows of the company's existing products by $250,000 a year (Years 1-4). The company's overall WACC is 10 percent. However, the proposed project is riskier than the average project and the project's WACC is estimated to be 11.5 percent. The company's tax rate is 40 percent. Given this information, determine the net present value of the proposed project.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
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Transcribed Image Text:Assume that your company is considering a new project and has collected the following information
about the project. (Note: You may or may not need to use all of this information, use only the
information that is relevant.)
The project has an anticipated economic life of 4 years.
The company will have to purchase a new machine. The machine will have an up-front cost of $2
million at Year O. The machine will be depreciated on a straight-line basis over 4 years (that is,
depreciation expense will be $500,000 in each of Years 1-4). The company anticipates that the
machine will last for four years, and that after four years, its salvage value will equal zero.
If the company goes ahead with the proposed product, it will have an effect on the company's
net operating working capital. At the outset, Year O, inventory will increase by $140,000 and
accounts payable will increase by $40,000. At Year 4, the net operating working capital will be
recovered after the project is completed.
The project is expected to generate sales revenue of $2 million in Year 1, $3 million in Years 2
and 3, and $2 million in Year 4. Each year the operating costs (not including depreciation) are
expected to equal 50 percent of sales revenue.
The company's interest expense each year will be $100,000.
The new project is expected to reduce the after-tax cash flows of the company's existing
products by $250,000 a year (Years 1-4).
The company's overall WACC is 10 percent. However, the proposed project is riskier than the
average project and the project's WACC is estimated to be 11.5 percent.
The company's tax rate is 40 percent.
Given this information, determine the net present value of the proposed project.
Answer in dollar and cents, with no punctuation. For example, if your answer is $59.255.48, enter
59255.48"
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