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EBike, Inc. is considering opening a new product line for its Arlington factory to meet the demand for solar- charged e-bikes. The proposed project has the following features: • The project has an initial cost of $30,000,000 for manufacturing equipment related investments. • The firm just spent $450,000 for a marketing study to determine consumer demand (@t-0). • The project will utilize unused factory floor space that could otherwise be leased for 5 years for a one time upfront payment of $332,800 (@t-0). • If the project is undertaken, at t=0 the company will need to increase its inventories by $4,500,000, accounts receivable by $1,600,000, and its accounts payable by $2,500,000. This net operating working capital will be recovered at the end of the project's life. • If the project is undertaken, the company will realize an additional $14,000,000 in sales over each of the next five years. (i.e. project related sales in each year are $14,000,000) • The company's operating cost (not including depreciation) will equal 45% of sales. • The company's tax rate is 35 percent. • Use a 3-year MACRS depreciation schedule (provided below). • At t = 5, the project is expected to cease being economically viable and the equipment will be sold for $5,500,000. • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the project's NPV? Round to nearest whole dollar value. Year 1 33.33% Year 2 45.45% Year 3 14.81% Year 4 7.41% EBike, Inc. is considering opening a new product line for its Arlington factory to meet the demand for solar- charged e-bikes. The proposed project has the following features: • The project has an initial cost of $30,000,000 for manufacturing equipment related investments. • The firm just spent $450,000 for a marketing study to determine consumer demand (@t-0). • The project will utilize unused factory floor space that could otherwise be leased for 5 years for a one time upfront payment of $332,800 (@t-0). • If the project is undertaken, at t=0 the company will need to increase its inventories by $4,500,000, accounts receivable by $1,600,000, and its accounts payable by $2,500,000. This net operating working capital will be recovered at the end of the project's life. • If the project is undertaken, the company will realize an additional $14,000,000 in sales over each of the next five years. (i.e. project related sales in each year are $14,000,000) • The company's operating cost (not including depreciation) will equal 45% of sales. • The company's tax rate is 35 percent. • Use a 3-year MACRS depreciation schedule (provided below). • At t = 5, the project is expected to cease being economically viable and the equipment will be sold for $5,500,000. • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the project's NPV? Round to nearest whole dollar value. Year 1 33.33% Year 2 45.45% Year 3 14.81% Year 4 7.41%
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To calculate the projects NPV we need to find the present value of all cash flows both initial investment and future cash flows and then subtract the ... View the full answer
Related Book For
Fundamentals Of Financial Management
ISBN: 9780273713630
13th Revised Edition
Authors: James Van Horne, John Wachowicz
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