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A firm is evaluating a new project that will last 4 years. The equipment needed for...

A firm is evaluating a new project that will last 4 years. The equipment needed for this project costs $180,000 and can be depreciated using straight-line depreciation over a 6-year useful life. This project will reduce sales of an existing product by $30,000 each year. Sales of this new project are expected to be $255,000 each year and variable costs are 85% of net sales. The project also requires fixed costs of $20,000 each year. The firm will use a manufacturing plant that they purchased 3 years ago for $275,000. Currently the market value of this plant is $250,000, after taxes. At the end of 4 years, itis expected that this plant will be worth $175,000, after taxes. The project requires less working capital than the firm currently has. At the beginning of the project, the firm will be able to reduce its total working capital by $15,000. At the end of the project, working capital will have to return to its previous level, before this project was started. The firm’s marginal tax rate is 35%andthe required return on this project is 10%. Should the firm accept this project? Why or why not?

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jeff jeffy answered 4 months ago
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