CAPITAL BUDGETING PROBLEM
Cashman Corp. is considering venturing into the very mysterious Project Z. Information on Project Z follows below. Cashman’s marginal tax rate is 34%. Calculate Project Z’s NPV and IRR. Should Cashman accept Project Z?
Project Z is a 4 year project; the required return on project Z is 12%.
Initial (up front) investment is $1,200,000
Annual revenues estimated at $4,000,000
Annual expenses (not including depreciation) estimated at $2,900,000
Depreciation for tax purposes is based on 6 year life, straight line, to zero book value at end of 6 years
At the end of the project (in year 4), will sell Project Z for expected market value of $500,000
Net Working Capital: initial investment required is $1,100,000 (up front); after that, NWC levels decrease by $275,000 per year.