Question

Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000.

10. (15) Ghost Screams is considering a new product line. It requires a new machine that will cost $24,000,000. The machine will be fully depreciated to a zero-book value on a straight-line basis over 3 years. The project will generate $72,000,000 in revenues each year for 3 years. Variable costs are 75% of sales and fixed costs are $5,000,000 per year for 3 years. They will have $2,000,000 annually in interest expense as part of the financing. The initial investment in net working capital is $5,000,000. No additional net working capital is needed for the project and no net working capital will be returned. The variable and fixed costs do not include the depreciation and the interest expenses. There is no horizon value. The tax rate is 25%.

a. If the cost of capital is 8%, find the net present value.

b. Find the internal rate of return.

c. Do they accept the project? Explain.

Answer 1

C. They wont accept the project as the NPV is negative