You have been asked to provide an NPV analysis of a proposed project which would generate...

 

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You have been asked to provide an NPV analysis of a proposed project which would generate cash flows over a period of 4 years. In the first year, revenues are estimated at $8 million and the expenses at $2 million. Both revenues and expenses are expected to increase by 5% each year for the following 3 years. The project requires an initial investment of $20 million in machinery. Machinery can be depreciated for tax purposes using the straight-line method over 4 years. After four years we expect that the company can sell the machinery for $15 million. The data are based on the output of an initial rearch study (R&D) that the company performed last year. The R&D that determined that the project is technically feasible had a cost of $1 million. The proposed project requires to keep a working capital (level) of 10% of next year's rev- enues. The opportunity cost of capital for the investment is 15%. The firm's tax rate is 35%. Please compute the NPV and IRR and make a recommendation on whether the project should be undertaken or not. You have been asked to provide an NPV analysis of a proposed project which would generate cash flows over a period of 4 years. In the first year, revenues are estimated at $8 million and the expenses at $2 million. Both revenues and expenses are expected to increase by 5% each year for the following 3 years. The project requires an initial investment of $20 million in machinery. Machinery can be depreciated for tax purposes using the straight-line method over 4 years. After four years we expect that the company can sell the machinery for $15 million. The data are based on the output of an initial rearch study (R&D) that the company performed last year. The R&D that determined that the project is technically feasible had a cost of $1 million. The proposed project requires to keep a working capital (level) of 10% of next year's rev- enues. The opportunity cost of capital for the investment is 15%. The firm's tax rate is 35%. Please compute the NPV and IRR and make a recommendation on whether the project should be undertaken or not.

Answer rating: 100% (QA)

To calculate the Net Present Value NPV and Internal Rate of Return IRR of the proposed project we need to determine the cash flows for each year and d... View the full answer