Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $5.0 million. The marketing department predicts that sales related to the project will be $4.00 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold are predicted to be 25 percent of sales. Howell also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The after-tax WACC for Howell is 13 percent. The machine can be sold for $600,000 at T=4. What is the cash flow at T=0? What is the cash flow at T=1? What is the cash flow at T=4? What is the NPV of the project?
Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $5.0 million. The marketing department predicts that sales related to the project will be $4.00 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold are predicted to be 25 percent of sales. Howell also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The after-tax WACC for Howell is 13 percent. The machine can be sold for $600,000 at T=4. What is the cash flow at T=0? What is the cash flow at T=1? What is the cash flow at T=4? What is the NPV of the project?
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
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Howell Petroleum is considering a new project that complements its existing business.
- The machine required for the project costs $5.0 million.
- The marketing department predicts that sales related to the project will be $4.00 million per year for the next four years, after which the market will cease to exist.
- The machine will be
depreciated down to zero over its four-year economic life using the straight-line method. - Cost of goods sold are predicted to be 25 percent of sales.
- Howell also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life.
- The corporate tax rate is 35 percent.
- The after-tax WACC for Howell is 13 percent.
- The machine can be sold for $600,000 at T=4.
- What is the cash flow at T=0?
- What is the cash flow at T=1?
- What is the cash flow at T=4?
- What is the NPV of the project?
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