The Mars Company is considering a major expansion of its business. The details of the proposed expansion project are summarized below:
- The company will have to purchase $500,000 in equipment at t=0. This is the depreciable cost
- The project has an economic life of four years
- Annual depreciation will be 165,000, 225,000, 75,000, and 35,000 for years 1 through 4, respectively
- At the end of four years, the company will sell the fixed assets at a salvage value of $100,000
- The company forecasts that the project will generate $800,000 in sales the first two years (t=1 and 2) and $500,000 in sales during the last two years (t=3 and 4).
- Each year the project's operating costs excluding depreciation are expected to be 60% of sales revenue.
- The company's tax rate is 40%
- The project's cost of capital is 10%
Required:
Question: What is the NPV of the project? Should the firm accept this project?
Note: Please provide step by step solution.