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
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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.

 

  1. What is the cash flow at T=0?
  2. What is the cash flow at T=1?
  3. What is the cash flow at T=4?
  4. What is the NPV of the project?
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