Question

Question 2 [15 marks]

Edwards Industries is a manufacturer of healthcare products. The company is evaluating the feasibility of a new household disinfectant product that uses ultraviolet radiation technology. The project has a lifespan of 10 years and is expected to generate a yearly revenue of $5.2 million and a yearly operating expense of $1.2. The new manufacturing equipment will cost $15 million, and production and sales will require an initial $5 million investment in working capital.  The equipment will be fully depreciated using the straight-line method over the life of the project with a salvage value of $2 million (after tax). In addition, the company spent $150,000 in research related to the product last year. Rather than acquiring a new building, the company plans to install the equipment in a building that it owns but currently unoccupied. The building could be sold for $3 million after taxes and relevant fees. The company's tax rate is 30%.  

If the expected return from shareholders is 12% per year, what is the project's NPV? Should the project be accepted?

Answer 1

NPV of the project = -$2382963

Since the NPV is negative it is not recommended to invest in the project

* Expenses incurred for research and development are sunk costs thus ignored