Question

Suppose you have been hired by Raytheon, the world's leading producer of defense equipments, as a financial consultant. The company is looking at setting up a manufacturing plant to produce a new line of defense equipments,.The new manufacturing plant will cost $12 million to build. The manufacturing plant has an eight-year depreciation tax life and a six year useful life. Raytheon uses straight-line depreciation. At the end of the project (i.e., the end of Year 6), the plant can be sold for $5 million. The plan is to manufacture 15,000 equipments per year and sell them at $500.00 each; the variable production costs are $350.00 per equipment. The company will incur $250,000 in annual fixed costs. Raytheon corporate tax rate is 40 percent and the firm’s WACC is 9.5%. The project will result in an increase of $800,000 in current assets (inventories, etc.), however accounts payable will also increase by $150,000. What is the project’s NPV?

Answer 1