Question

Calculating NPV Thurston Petroleum is considering a new project that complements its existing business. The machine required for the project costs $4.1 million. The mar- keting department predicts that sales related to the project will be $2.35 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its 4-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. The company also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 25 percent and the required return for the project is 13 percent. Should the company proceed with the project?

Answer 1

sol. 2C 7.SI Initial Investment Cost & Working Capital JOZSOL 7002 4 looooot 150000 $425oooo - I Depreciation 2= 25 lost =) 25 410vovo 4 750 = $ 1025000 talidos Cash Flow 4 2 3 2016SEL 25162 251DF21 251DF2 sales 2350000 2350000 23500w 2350000 - er lost+ (587500) + (58756) (58 7500) (587500) Dep. (1025000) C102 Sou) (102 Sow) C102560) 16 (41) w EBIT 737500 73750 73750 73750 astat21+ TS10 F2lt slotalt Joto RSP - (-). Tox) (217! @ 251 (16 4375 (184375 (184375 (184375 SIDSEL + EAT 553125 553125 553/25 553125

EAT 553125 553125 553125 553125 a 1025000 10250w 0021981 + Dep. 102500 1025ow GCF 001578125 - 1578 125 1578125 1578125 (t) Whing Copilet doo Reconey 1500ro 1578125 1578125 1578125 1728125 O 25 TO 2 LONpir= -croit CAL+ + cft cf3 tify (ta) (Haj (17) 3 (1 ) (f= cash flow r= rate of return OFEE = - 4250000 + 1578125 + 1570125 + 157812S (It 13./ (1+13%) 2 CH 13/13 hrees) (24 EPB1) 1278 p. 2.FEtolla + 1728125 (+137.14

- 42500vo + 4786085:37 $536085.37 is positiu it since should NPV be of project accepted.