Ohio Building Products (OBP) is considering the launch of a new product which would require an initial

Question:

Ohio Building Products (OBP) is considering the launch of a new product which would require an initial investment in equipment of $30,800 (no investment in working capital is required). The forecast profits from the product are as follows:

No cash flows are forecast after year 2, and the equipment will have no salvage value. The cost of capital is 10%.
a. What is the project's NPV?

b. Calculate the expected EVA and the return on investment in each of years 1 and 2.
c. Why does EVA decline between years 1 and 2, whereas the return on investment is unchanged?
d. Calculate the present value of the economic value added. How does this figure compare with the project NPV?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...