A firm is considering a project that requires no new purchases of equipment.  Instead, they will repurpose existing machines that they already own.  These machines were originally bought for $1 million 10 years ago and were depreciated straight line over that period to a book value of $0 today.  Their market value is estimated to be $65,000.  The machines require no investment in repairs or refurbishment for the new project.   The new project is expected to generate revenues of $90,000 per year for four years.  Operating expenses will be 72% of revenues.  The project requires an initial investment in working capital of $2,000. Further investments in working capital will be needed as follows: an additional $1,000 at t=1, $1,500 at t=2, and $3,000 at t=3.  It is assumed that all of the investments in working capital made over t=0,1,2,3  will be completely recovered at the end of the project.  The corporate tax rate is 34%.  At t=4, the market value of the equipment is expected to be $26,000 when the company plans to liquidate the equipment.  If the cost of capital is 13%, should the investment be undertaken?

Answer rating: 100% (QA)

Sure lets calculate the cash flows and NPV Year 0 Initial investment in working capital 2000 Year 1 ... View the full answer