Company X is debating a project. The sales are expected to be 15 000 units for each of 5 years after that the machinery will be discarded (assume zero value at that time). The price of the unit might be either $13.50 or $13.70 with equal probabilities. Variable costs are $4.30 per unit and Fixed costs are $49 000 per year. The initial investment of $275000 can be depreciated along straight line to zero during the life of the project.
Required return is 13%, taxes are 34% and there is no change in NWC. Will you accept the project? Why or why not? (Assume taxes are paid at the end of each project's year.).
First, the most important concept of evaluating these investments is the NPV. NPV is defined as the difference between an investment's market value and its cost. NPV is a discounted cash flow technique, which explicitly recognize the ...
The solution uses a rate of return to select a project.