The Forest Green Company is considering purchasing additional equipment that would have an initial cost of $500,000. They estimate it would add $250,000 to pre-tax revenues and variable operating expense (before taking account of depreciation) per year of 35%, for the first 4 years. In Year 5, they will cease production, and therefore will have no additional revenues or ongoing operating costs, but will incur one-time expense of $40,000 for severance pay (aside from depreciation).

 The packaging machine will be depreciated on a straight-line basis, over 5 years, and will have no salvage value (ignore the MACRS depreciation methodology for this problem.)

Assuming a 19% marginal tax rate, and a 6.5% WACC, calculate the NPV of this investment.  

Do you recommend this project? Why? 

 

For Calculating npv, use the format of the below table and calculate npv using excel formula:

	Yr 0	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
Project A

Answer rating: 100% (QA)

To calculate the net present value NPV of the investment and determine whether Forest Green Company should proceed with the project we need to conside... View the full answer