Howell Petroleum is considering a new project that complements its existing business. The machine required for the

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Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.57 million. The marketing department predicts that sales related to the project will be $1.95 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 30 percent of sales. The company also needs to add net working capital of $575,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 21 percent. The required rate of return is 14 percent. Should the company proceed with the project?

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Corporate Finance Core Principles And Applications

ISBN: 9781260571127

6th Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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