Case #$3$: Evaluating a Single Project Using NPV Analysis $(15$ marks$)$

Go Video, a manufacturer of video recorders, is considering a proposal to enter a new line of business. In reviewing the proposal, the company$$s CFO is considering the following facts:

The new business will require the company to purchase additional fixed assets that will cost $$800,000$ at t $=0.$ For tax and accounting purposes, these costs will be depreciated on a straight$-$line basis over four years with zero salvage value. $($i$.$e$.,$ Annual depreciation will be $$200,000$ per year at t $=1,2,3$ and $4).$

The project will require a $$400,000$ increase in net operating working capital at t $=0,$ which will be recovered at t $=4.$ The company$$s marginal tax rate is $30$ percent.

Sales are expected at $1\mathrm{.}5$ million units per year. Price per unit is $$2\mathrm{.}5,$ variable cost per unit is $$1\mathrm{.}3,$ and fixed costs are $ $1$million per year.

If the project$$s cost of capital $($WACC$)$ is $12$ percent per year, is this proposal a sound one? Justify your answer.