Paper King Inc. considers a new project. After a marketing campaign which costs $20,000, the firm decides to produce notebooks with chalk overlay paper. This project requires investment in chalk overlay paper machine that costs $ 450,000. The machine

is supposed to be straight-line depreciation over the life of the project (3 years) to zero

salvage value. Paper King Inc. expects however to sell the paper chalk machine at the end of the 3rd year for 10% of its initial value. Paper King forecasts revenues in the first year of 400,000 and the revenues increase by 10% every year. The operating costs constitute 62.5% of revenues. The project requires an investment in working capital in year 0 of $ 80,000 and it is going to increase in year 1 and 2 at the same rate as revenues do. The working capital is fully recovered at the end of the 3rd year.

e) Compute the NPV of the project 

f) What is the payback period? 

g) Verify whether 5.20% is the internal rate of return on this project and show your calculations.

 

 

Answer rating: 100% (QA)

To compute the NPV of the project we need to calculate the present value of cash inflows and outflows and then subtract the initial investment Lets br... View the full answer