Happy Holiday Inc (HHI) is considering a new capital budgeting project that will last for three years. The initial investment outlay for project equipment is expected to be $120,000. The equipment will be straight-line depreciated down to zero book value over the three-year period. The company anticipates it can sell the asset for $60,000 when the project is liquidated at the end of the third year. The project requires an initial investment in Net Working Capital of $10,000 and another investment in networking capital in year 2 of $10,000. The project also requires an additional investment in fixed assets during year 1, in the amount of $15,000. HHI's cost of capital is 10% and the project does not have a distinct risk profile. HHI's tax rate is 35%. Based on extensive research, analysts have prepared the below incremental revenues. The gross margin is estimated to 50% of sales, and it is assumed to be the similar to those for other projects HHI. Year Sales (Revenues) 100,000 120,000 140,000 Note: Additional fixed capital investments are depreciated straight line over a three- year period; the first depreciation expense is deducted at the end of the year following the investment. The $60,000 liquidation value reflects enhancements realized through capital investments in fixed assets. Also assume that the Net Working Capital will be recovered at the end of the project. What is the NPV of the project? (Hint: Make sure to consider the terminal value in your calculations) O $37,055 O $27,280 O $56,670 O None of the above
Happy Holiday Inc (HHI) is considering a new capital budgeting project that will last for three years. The initial investment outlay for project equipment is expected to be $120,000. The equipment will be straight-line depreciated down to zero book value over the three-year period. The company anticipates it can sell the asset for $60,000 when the project is liquidated at the end of the third year. The project requires an initial investment in Net Working Capital of $10,000 and another investment in networking capital in year 2 of $10,000. The project also requires an additional investment in fixed assets during year 1, in the amount of $15,000. HHI's cost of capital is 10% and the project does not have a distinct risk profile. HHI's tax rate is 35%. Based on extensive research, analysts have prepared the below incremental revenues. The gross margin is estimated to 50% of sales, and it is assumed to be the similar to those for other projects HHI. Year Sales (Revenues) 100,000 120,000 140,000 Note: Additional fixed capital investments are depreciated straight line over a three- year period; the first depreciation expense is deducted at the end of the year following the investment. The $60,000 liquidation value reflects enhancements realized through capital investments in fixed assets. Also assume that the Net Working Capital will be recovered at the end of the project. What is the NPV of the project? (Hint: Make sure to consider the terminal value in your calculations) O $37,055 O $27,280 O $56,670 O None of the above
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Q1
Transcribed Image Text:Happy Holiday Inc (HHI) is considering a new capital budgeting project that will last
for three years. The initial investment outlay for project equipment is expected to be
$120,000. The equipment will be straight-line depreciated down to zero book value
over the three-year period. The company anticipates it can sell the asset for
$60,000 when the project is liquidated at the end of the third year.
The project requires an initial investment in Net Working Capital of $10,000 and
another investment in networking capital in year 2 of $10,000.
The project also requires an additional investment in fixed assets during year 1, in
the amount of $15,000.
HHI's cost of capital is 10% and the project does not have a distinct risk profile.
HHI's tax rate is 35%. Based on extensive research, analysts have prepared the
below incremental revenues.
The gross margin is estimated to 50% of sales, and it is assumed to be the similar to
those for other projects HHI.
Year
Sales (Revenues)
Note: Additional fixed capital investments are depreciated straight line over a three-
year period; the first depreciation expense is deducted at the end of the year
following the investment. The $60,000 liquidation value reflects enhancements
realized through capital investments in fixed assets. Also assume that the Net
Working Capital will be recovered at the end of the project.
What is the NPV of the project?
(Hint: Make sure to consider the terminal value in your calculations)
$37,055
100,000 120,000 140,000
O $27,280
$56,670
O None of the above
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education