Question

Hole-in-One Inc. is considering expanding its golf ball business. Each pack of golf balls contains 3 balls. The company has projected the following information:

• Sales of 2,000,000 packs per year at $6 per pack.
• Total costs per pack is $4.  
• The project has a 5 year life.
• The required new equipment costs $15,000,000. This equipment will be depreciated straight line to zero over the life of the project. Another firm has made an offer to purchase the equipment at the end of the project for $1,000,000, which the company plans to accept.
• Initial change in net working capital is $1,000,000 and 50% will be recovered in the terminal year.
• The firm’s required rate of return is 8%.
• The firm’s tax rate is 21%.

Question: If the company decided that the riskiness of the project was more than originally expected, and it decided to increase the discount rate to 8.1%, would it accept or reject the project?

Answer 1

Net present value is calculated as present value of cash inflow less present value of cash outflow

Calculation for net present value is shown below

Working is given below