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In: Finance

Capital budgeting The company is going to analyse a new investment project, which has the following...

  1. Capital budgeting

The company is going to analyse a new investment project, which has the following characteristics:

Unit price                                                                $5.00

Annual unit sales                                                   40,000

Variable cost per unit                                           $2.5

Investment into new machinery (t=0)              $400,000

Investment in working capital                           $50,000               (fully recovered at the end of project)

Project life                                                              6 years

Annual depreciation                                             $60,000

Market value of machinery (t=6)                       80,000

Tax rate                                                                    40 %                     (the same for profits and capital gains)

Required rate of return (WACC)                        10 %

Marketing research expense                              $16,000               (the research was done earlier this year)

Questions:

  1. Find the project cash flows (incl. initial investment, operating cash flows each year and terminal cash flow)
  2. Evaluate the project NPV
  3. Should the company invest into such project? Explain.

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