. ABC Co., makes and markets cars and toothpaste. It is considering a new factory to manufacture televisions. The details of this 5-year project (i.e. initial investment followed by 5 years of operations) are as follows:

• Initial investment of $240,000
• 200 units will be sold each year for the five years.
• Price per unit sold of $500
• Variable cost per unit sold of $200
• Due to a special government incentive, the firm pays no tax
• The initial investment will be depreciated to 0 salvage with straight line depreciation over the life of the project
• As a result of the project the net working capital for the firm will go up by $60,000 at the end of year 1, another $65,000 (i.e. for a cumulative $125,000) at the end of the second year and will go down to its original (pre-project) level at the end of year 5
• Make the usual assumption that the initial investment takes place immediately and the five other cash flows come in at the end of each operating year
• ABC is an all equity firm and will remain so after the project which will be entirely funded by equity.

You are provided with the following details about a firm and its operating environment:

Risk free rate = 5%

Expected return on the market = 12%

of automotive division = 1.7

of toothpaste division = 0.9

for the firm as a whole = 1.3

There is one firm in the television manufacturing industry. It has an equity beta of 1.2 and a debt-equity ratio of 1:1. Assume beta of debt is zero for all firms.

Find the NPV for the project. Should the project be undertaken?

Answer rating: 100% (QA)

To calculate the NPV of the project we need to find the required rate of return discount rate and th... View the full answer