Question

ABC Corporation is considering an expansion project. The proposed project has the following features: The project has an initial cost of $1,000,000 (machine: $800,000, insurance: $40,000, shipping $60,000, modification: $100,000) --this is also the amount which can be depreciated using the following 3 year MACRS depreciation schedule:

Year	Depreciation Rate
1	33%
2	45%
3	15%
4	7%

The sales price and cost are both expected to increase by 4 percent per year due to inflation. If the project is undertaken, net working capital would have to increase by an amount equal to 10% of sales revenues. This net operating working capital will be recovered at the end of the project’s life (t = 4). (You must consider an inflation effect.) If the project is undertaken, the company will sell additional 100,000 units in the next four years (t = 1, 2, 3, 4). Unit price at the end of the Year 1 is $10. The company’s operating cost (not including depreciation) will equal to 50% of sales. The company’s tax rate is 40 percent. The company has no debt. At the end of Year 4, the project’s economic life is complete, but the company can sell the machine at $20,000 (market value of salvage). The project’s WACC = 8 percent.

QUESTION: What is the project’s net present value (NPV)?

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Answer 1