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In analyzing a new potential business MacDonald Publishing’s financial staff is estimating an initial capital expenditure...

In analyzing a new potential business MacDonald Publishing’s financial staff is estimating an initial capital expenditure of $6.1 million. This equipment will be depreciated according to the MACRS 3 year class life and will have a market value of $1 million after four years. If MacDonald goes ahead with the new business, inventories and accounts payable will increase by $300,000 each. The new business is expected to have an economic life of four years and is expected to generate annual sales of 5 million and incur operating costs (excluding depreciation) of 3 million annually. If the company's tax rate is 40 percent and the required return is 10 percent, calculate the expected NPV of the new business.

Solutions

Expert Solution

inventories and accounts payable will increase by $300,000 each so change in working capital is zero.

Annual Cash flow and NPV at 10% discount rate is calculated in excel and screen shot provided below:

NPV of project is $144,303.40.

Since, NPV of project is a positive value, so project should be accepted.

jeff jeffy answered 2 years ago
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