4. (20 points) USX is considering adding an additional furnace that will operate for four years. The new furnace costs $1,400 million and has a salvage value of $500 million at the end of the four-year period. According to IRS rules, the new furnace must be depreciated straight line over seven years to a salvage value of 0.

   The new furnace will need parts from an old furnace USX already owns. The old furnace is fully depreciated and has a salvage of $80 million at t=0. Without the parts, which are no longer manufactured, the old furnace has no salvage value.

   The new furnace will generate sales of $800 million per year for four years. Operating expenses, excluding depreciation, are 45% of sales each year (revenues and expenses occur at t =1, 2, 3 and 4).

   The project would require net working capital at the beginning of each year in an amount equal to 12% of the year's projected sales: the net working capital at the beginning of the first year (t = 0) is 12% of the sales at t = 1; the net working capital the beginning of the second year (t = 1) is 12% of the sales at t = 2; the net working capital at the beginning of the third year (ie at t = 2) is 12% of the sales at t = 3; the net working capital at the beginning of the fourth year (ie at t = 3) is 12% of the sales at t = 4. Assume that net working capital is fully recovered at the end of the project.

   The corporate tax rate is 20% and the cost of capital is 9%. Should USX go ahead with the new furnace? (You can use either of the two methods to account for depreciation, you dont need to use both methods.)

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