Johnson Chemicals is considering an investment project. The project requires an initial P3 million outlay for equipment and machinery. Sales are projected to be P1.5 million per year for the next four years. The equipment will be fully depreciated straight- line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for P400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of P100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10%. What is the NPV of this investment?
Johnson Chemicals is considering an investment project. The project requires an initial P3 million outlay for equipment and machinery. Sales are projected to be P1.5 million per year for the next four years. The equipment will be fully depreciated straight- line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for P400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of P100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10%. What is the NPV of this investment?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![Johnson Chemicals is considering an investment project. The
project requires an initial P3 million outlay for equipment and
machinery. Sales are projected to be P1.5 million per year for the
next four years. The equipment will be fully depreciated straight-
line by the end of year 4. Cost of goods sold and operating
expense (not including depreciation) are predicted to be 30% of
sales. The equipment can be sold for P400,000 at the end of year
4. Johnson Chemicals also needs to add net working capital of
P100,000 immediately. The net working capital will be recovered
in full at the end of the fourth year. Assume the tax rate is 40%
and the cost of capital is 10%.
What is the NPV of this investment?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3e3690b0-bbd8-44f9-845b-0e2687b4c05f%2F9e1f2194-1c93-4746-ab0d-c0c39d3a29d8%2F3o5wsa9_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Johnson Chemicals is considering an investment project. The
project requires an initial P3 million outlay for equipment and
machinery. Sales are projected to be P1.5 million per year for the
next four years. The equipment will be fully depreciated straight-
line by the end of year 4. Cost of goods sold and operating
expense (not including depreciation) are predicted to be 30% of
sales. The equipment can be sold for P400,000 at the end of year
4. Johnson Chemicals also needs to add net working capital of
P100,000 immediately. The net working capital will be recovered
in full at the end of the fourth year. Assume the tax rate is 40%
and the cost of capital is 10%.
What is the NPV of this investment?
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