Question
In: Finance
Eccles Paper Inc. is considering a three-year project to manufacture absorbent surgical pads based on its...
Eccles Paper Inc. is considering a three-year project to manufacture absorbent surgical pads based on its patented line of related products. The project requires immediate investment in equipment at $1,200,000. This will be depreciated straight-line to zero over five years, though the project will only last three years. At the end of the third year the equipment will be sold at a forecasted price of $600,000. Revenue is expected to be $5,200,000 in year one, and will increase by 5% for years two and three. Costs are 90% of sales. If the corporate tax rate is 35% and the cost of capital is 12%, should the project be pursued using the NPV criterion?
Solutions
Expert Solution
* Gain on sale = Sale value - Book value of machine
Gain on sale = 600000 - (1200000 - 720000)
Gain on sale = 120000
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