Question

Werton Corporation has developed a new processor that would be used by many specialty companies. It would cost $19 million at Year 0 to buy the equipment necessary to manufacture the facility. The project would require net working capital in Year 0 of 3,000,000 and then 4 percent of revenue in each of the operational years to follow (Year 1 to Year 3). (Note: recovery in this case will occur in period N+1). The processor would sell for $83,000 per unit, and Werton believes that variable costs would amount to $67,000 per unit. After Year 1, the sales price and variable costs are expected to remain constant (inflation = 0.0). The company's non-variable costs would be $1.3 million at Year 1 and would remain constant throughout the life of the project. The processor project would have a life of 3 years. If the project is undertaken it must be continued for the entire 3 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 700 units per year. The equipment would be depreciated over a 3-year period, using rates (34%, 33%, and 33%). The estimated market value (salvage value) of the equipment at the end of the project's 3-year life is $500,000, but environmental close down costs are estimated at $200,000 (these cash flows along with WC recovery should occur in Year 4). Werton's federal-plus-state tax rate 25%. Its cost of capital is 9% for average-risk projects. Should Werton invest in the project (i.e., calculate the NPV).

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Answer 1

Hie,

Werton Corporation should invest in the project,the NPV is coming positive+

The working are as follows :