A proposed investment has a cost of $1000. It will have a life of 4...
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A proposed investment has a cost of $1000. It will have a life of 4 years. The investment cost will be depreciated straight-line to a $200 salvage value, and will be sold $240 at the end of the project. The firm will also need to invest $150 in net working capital at year 0, to be recovered at the end of the project. Cash sales will be $620 in year 1 and cash costs will run $270 in year 1. Production costs will increase at 8% per year. Sales will increase at 5% per year. The corporate tax rate is 30%. The project is financed entirely with equity and the cost of equity is 10%.
a. Determine the cash flows during the life of the project for each year. Show your calculations to receive credit.
b. What is the NPV of the project? Is the project acceptable?
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