The company is considering a five-year project that will require $680,000 for new manufacturing equipment that will be depreciated straight-line to a zero-book value over five years (depreciation rate is 20% per year). At the end of the project, the equipment can be sold for 15 percent of its original cost.
The project requires an initial investment in net working capital of $90,000 (all of which will be recovered at the end of the project). The project is expected to generate annual sales of $845,000 with annual costs of $545,000. The tax rate is 25 percent and the required rate of return is 17.5 percent.
Instructions: Complete the pro forma and determine total cash flows for each year of the project’s life. Calculate initial outlay (total cash flow in Year 0), after-tax salvage value in Year 5, and NPV of the project. Explain your decision whether you recommend to accept or reject the project. Get Finance homework help today