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    Net present value (NPV) of the proposed project

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    Company A is considering a major expansion of its business. The details of the proposed expansion project are summarized below:
    ? The company will have to purchase $500,000 in equipment at t = 0. This is the depreciable cost.
    ? The project has an economic life of four years.
    ? The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule:
    MACRS
    Depreciation

    Year Rates
    1 0.33
    2 0.45
    3 0.15
    4 0.07

    ? At t = 0, the project requires that inventories increase by $50,000 and accounts payable increase by $10,000. The change in net operating working capital is expected to be fully recovered at t = 4.
    ? The project's salvage value at the end of four years is expected to be $0.
    ? The company forecasts that the project will generate $800,000 in sales the first two years (t = 1 and 2) and $500,000 in sales during the last two years (t = 3 and 4).
    ? Each year the project's operating costs excluding depreciation are expected to be 60% of sales revenue.
    ? The company's tax rate is 40%.
    ? The project's cost of capital is 10%.

    What is the net present value (NPV) of the proposed project?

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    https://brainmass.com/business/net-present-value/net-present-value-npv-of-the-proposed-project-109483

    Solution Preview

    Company A is considering a major expansion of its business. The details of the proposed expansion project are summarized below:
    ? The company will have to purchase $500,000 in equipment at t = 0. This is the depreciable cost.
    ? The project has an economic life of four years.
    ? The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule:
    MACRS
    Depreciation

    Year Rates
    1 0.33
    2 0.45
    3 0.15
    4 0.07

    ? At t = 0, the project requires that inventories increase by $50,000 and accounts payable increase by $10,000. The change in net operating working capital is expected to be fully recovered at t = 4.
    ? The project's salvage value at the end of four years is expected to be $0.
    ? The company forecasts that the project will generate $800,000 in sales the first two years (t ...

    Solution Summary

    This solution is comprised of a detailed explanation and calculation to compute net present value (NPV) of the proposed project in an Excel file.

    $2.19

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