Question

Royal Dutch Petroleum is considering a new project that complements its existing business. The machine required for the project costs $2 million. The marketing department predicts that sales related to the project will be $1.2 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 5-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25% of sales. After four years the machine can be sold for $150,000. Royal Dutch also needs to add net working capital of $100,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35%. The required rate of return for Royal dutch Petroleum is 16.55%. Should Royal Dutch proceed with the project?

please give steps in detail, do not use excel

Answer 1