Question

The beginining investment in equipment is $6.6 million. The equipment will be

depreciated straight – line over 6 years to a value of zero. After 6 years it can be sold at $643,000. The working capital must be maintained at a level of 15% of next year’s forecast sales. The estimate of the production costs equal to $1.90 per item and that the items can be sold for $6 each. Sales forecasts are below. The project will come to an end in 6 years. The firm’s tax bracket is 35%, and the required rate of return on the project is 12%.

Year: 0 1 2 3 4 5 6

Sales 0 0.4 0.5 0.7 0.7 0.5 0.3

A. By how much will this increase project NPV? 

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