Question: Howell Petroleum is considering a new project that complements its
Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.8 million. The marketing department predicts that sales related to the project will be $2.5 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The required rate of return for Howell is 16 percent. Should Howell proceed with the project?
Answer to relevant QuestionsMassey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $640,000 is estimated to result in $270,000 in annual pretax cost savings. The press falls in the ...Etonic Inc. is considering an investment of $365,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $245,000 and ...Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year Unit Sales1 ..........83,0002 ..........92,0003 ..........104,0004 ..........98,0005 ...Sony International has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $165 million. The firm will depreciate the investment to zero using the straight-line method over ...L.J.’s Toys Inc. just purchased a $390,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its five-year economic life. Each toy sells for $25. The variable cost per toy ...
Post your question