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As a finance manager, you are presented with the following project. The company is considering...

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Finance

As a finance manager, you are presented with the following project. The company is considering the purchase of a new piece of equipment which would cost $200,000. This equipment will have a 5 year useful life and have a salvage value of $0 at the end of the 5 year period. It is estimated that:

-new equipment will product 10,000 shelves per year -incremental overhead for running the equipment will be $20,000 per year -they can sell the shelves for $25 each -cost of sales is $15 per shelf

Net Working Capital requirements for the project are as follows: Year 0: $10,000 Year 1: $15,000 Year 2: $17,000 Year 3: $15,000 Year 4: $10,000

The company has a 30% marginal tax rate and a cost of capital of 15%.

Question: If you decide to place the equipment in an idle warehouse which could be rented out for $5,000 per year. What is the new NPV? Should you still take the project?

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