Problem: Mills Mining is considering an expansion project. The proposed project has the following features:
• The project has an initial cost of $500,000 – this is also the amount which can be depreciated using the following depreciation schedule:
|
Year
|
Depreciation rate
|
|
1
|
33%
|
|
2
|
45
|
|
3
|
15
|
|
4
|
7
|
• If the project is undertaken, at t=0 the company will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. this net operating working capital will be recovered at the end of the project’s life (t=4)
• If the project is undertaken, the company will realize an additional $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 $400,000 a year
• The company’s tax rate is 40%
• At t=4, the project’s economic life is complete, but it will have a salvage value of $50,000
• The project’s WACC = 12%
What is the project’s net present value (NPV)?