Alvinstar Co is considering investing in a new animal feed
Alvinstar Co. is considering investing in a new animal feed project. The product will be a soup for cats to be sold in cans. Alvinstar plans to sell 100,000 cans a year for four years at a price of $4 per can. Fixed costs will include rent on the production facility at $50,000 a year, plus annual depreciation expense of
$50,000 on production equipment that will cost $200,000 installed. After taking into account the cost of removing the equipment, the net receipt of selling the equipment after four years is expected to be zero. Variable costs will amount to $2 per can. The project will require an investment in the operating cycle, or working capital requirement of $40,000. The tax rate is 40 percent. Alvinstar's weighted average cost of capital is 10 percent.
a. Compute the project's net present value.
b. Compute the project's expected annual economic value added.
c. Compute the project's market value added.
d. What is the necessary condition for the project's net present value to be equal to the present value of its future expected economic value added and to its market value added?
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