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In: Finance
Lebbo Ltd is considering investment in a new plant costing $5 million. The plant is expected...
Lebbo Ltd is considering investment in a new plant costing $5 million. The plant is expected to generate sales of $4 million per year for its estimated life of eight years. Sale revenue increases 5% each year. Costs of sales are expected to be 40% of sales. For depreciation purposes the plant will be written down, on a straight line basis, to 20% of its original cost by the end of the project. The company evaluates projects on the basis of after-tax cash flows, and the relevant tax rate is 30%. At the end of the project's life, the plant is expected to have a resale value of $2 million.
While the new machine requires an initial net working capital of $70,000, The current level of net working capital is 50,000. The subsequent net working capital requirement will be 10% of sales revenue.
If the required rate of return is 24%, what is the NPV of this project? Should it be accepted?
Solutions
jeff jeffy answered 2 years agoRelated Solutions
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