You have been asked to provide an NPV analysis of a proposed project which would generate cash flows over a period of 4 years. In the first year, revenues are estimated at $8 million and the expenses at $2 million. Both revenues and expenses are expected to increase by 5% each year for the following 3 years. The project requires an initial investment of $20 million in machinery. Machinery can be depreciated for tax purposes using the straight-line method over 4 years. After four years we expect that the company can sell the machinery for $15 million. The data are based on the output of an initial rearch study (R&D) that the company performed last year. The R&D that determined that the project is technically feasible had a cost of $1 million. The proposed project requires to keep a working capital (level) of 10% of next year's rev- enues. The opportunity cost of capital for the investment is 15%. The firm's tax rate is 35%. Please compute the NPV and IRR and make a recommendation on whether the project should be undertaken or not.

You have been asked to provide an NPV analysis of a proposed project which would generate cash flows over a period of 4 years. In the first year, revenues are estimated at $8 million and the expenses at $2 million. Both revenues and expenses are expected to increase by 5% each year for the following 3 years. The project requires an initial investment of $20 million in machinery. Machinery can be depreciated for tax purposes using the straight-line method over 4 years. After four years we expect that the company can sell the machinery for $15 million. The data are based on the output of an initial rearch study (R&D) that the company performed last year. The R&D that determined that the project is technically feasible had a cost of $1 million. The proposed project requires to keep a working capital (level) of 10% of next year's rev- enues. The opportunity cost of capital for the investment is 15%. The firm's tax rate is 35%. Please compute the NPV and IRR and make a recommendation on whether the project should be undertaken or not.

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 26P

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