Haggard Band, Inc. is considering a new project which requires an initial investment in equipment of $160,000 and is expected to generate sales revenue of $360,000 in the first year (i.e., at t=1). This revenue will increase by 10% per year over the next 2 years (i.e., t=2 and t=3). Variable costs are estimated to be 65% of sales. The corporation paid a consulting firm $30,000 to conduct a feasibility research last year. They also own an empty facility outside of Munich, which was purchased 5 years ago for $27,000. This facility can be used to store products generated from this project. Alternatively, it can be rented for a pre-tax income of $5,000 per year. The assets are depreciated straight-line to zero over 3 years. The corporate tax rate is 40%. The project requires an investment in working capital. At the beginning of the project (i.e., t=0), $12,000 of working capital is required. Thereafter, working capital is projected to increase ten percent each year. At the end of the project, the net working capital is expected to be fully recovered, and the machines and equipment acquired for the project can be sold for $8,000. The nominal cost of capital for this project is 14%. All cash flows are nominal. 

Compute the NPV and decide if the band should go ahead with the project based on the NPV.

Answer rating: 100% (QA)

To compute the NPV of the project we need to calculate the cash flows for each year and then discoun... View the full answer