Question: Mills Mining is considering an expansion project. The proposed project has the following features:
[A] The project has an initial cost of dollar 500,000 this is also the price which can be depreciated using the given depreciation schedule:
|
Year
|
Depreciation Rate
|
|
1
|
33%
|
|
2
|
45
|
|
3
|
15
|
|
4
|
7
|
[A] If the project is undertaken, at t = 0 the company will need to increase its inventories by dollar 50,000, and its accounts payable will rise by dollar 10,000. This net operating working capital will be recovered at the end of the project's life [t = 4].
[B] If the project is undertaken, the company will realize an additional dollar 600,000 in sales over each of the next four years [t = 1, 2, 3, 4]. The company's operating cost [not including depreciation] will equal dollar 400,000 a year.
[C] Tax rate is 40%.
[D] At t = 4, the project's economic life is complete, but it will have a salvage value of $50,000.
[E] WACC = 10.5%.
Calculate the project's net present value (NPV)?