Capital Budgeting: Natural Organics Products, a company with profitable ongoing operations, is considering a major six-year project on which the company has already incurred $1,200,000 in research and development costs. The vice-president in charge of finance has provided you with the following data and worksheet and has asked you to determine, using an NPV analysis, if the project should be undertaken. She has also hinted that your future with the company hinges on a successful analysis of the project. Data Sheet: Company’s tax rate = 40% Company’s opportunity cost of capital = 15% Net working capital requirements of the project if it is accepted: Year 0 $160,000 Year 1 $240,000 Year 2 $240,000 Year 3 $240,000 Year 4 $180,000 Year 5 $50,000 Year 6 $0 New equipment purchases required for the project total $14,000,000. At the end of the project, it is expected that the equipment can be sold to a competitor for $2,000,000. This equipment would be placed in the company’s in the asset class that depreciates using a 5-year period. During each year of the project it is expected that incremental revenues of $16,000,000 and incremental expenses of $9,000,000 will be generated. Assume that these pre-tax amounts occur at the end of each of the six years. A labor shortage will occur at each of the other NOP factories resulting in increased labor costs in those factories. The expenses are expected to be $800,000 at the end of the first year and are expected to grow by 4% per year for the remainder of the project. What is the NPV of the project and what is your recommendation?
Capital Budgeting:
Natural Organics Products, a company with profitable ongoing operations, is considering a major six-year project on which the company has already incurred $1,200,000 in research and development costs. The vice-president in charge of finance has provided you with the following data and worksheet and has asked you to determine, using an
Data Sheet:
Company’s tax rate = 40%
Company’s
Net working capital requirements of the project if it is accepted:
Year 0 $160,000
Year 1 $240,000
Year 2 $240,000
Year 3 $240,000
Year 4 $180,000
Year 5 $50,000
Year 6 $0
New equipment purchases required for the project total $14,000,000. At the end of the project, it is expected that the equipment can be sold to a competitor for $2,000,000. This equipment would be placed in the company’s in the asset class that
During each year of the project it is expected that incremental revenues of $16,000,000 and incremental expenses of $9,000,000 will be generated. Assume that these pre-tax amounts occur at the end of each of the six years.
A labor shortage will occur at each of the other NOP factories resulting in increased labor costs in those factories. The expenses are expected to be $800,000 at the end of the first year and are expected to grow by 4% per year for the remainder of the project.
What is the NPV of the project and what is your recommendation?
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