You work for a small pottery company that is considering selling products on the Internet. After...

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You work for a small pottery company that is considering sellingproducts on the Internet. After careful analysis, you estimate thatthe firm would need to spend $80,000 developing a Web site andintegrating it with the firm’s inventory system. For tax purposes,this investment can be depreciated using straight-line depreciationover 4 years (the salvage value is zero). The Web site willgenerate an additional $100,000 in sales. The costs of good soldwill equal $60,000. To support these sales, inventory will have toincrease by $8,000 in the first year. Inventory will remain at thislevel until the end of the project in 4 years, at which time itwill drop back to its original level. The tax rate is 40% and thecost of capital is 10%. Should the firm proceed with thisproject?

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Calculation of NPV at discount rate of 10 0 1 2 3 4 Initial cost 8000000 Investment in inventory Additional Sales 10000000 10000000 10000000 10000000 Less cost of goods sold 6000000 6000000 6000000 6000000 Less See Answer

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Transcribed Image Text

You work for a small pottery company that is considering sellingproducts on the Internet. After careful analysis, you estimate thatthe firm would need to spend $80,000 developing a Web site andintegrating it with the firm’s inventory system. For tax purposes,this investment can be depreciated using straight-line depreciationover 4 years (the salvage value is zero). The Web site willgenerate an additional $100,000 in sales. The costs of good soldwill equal $60,000. To support these sales, inventory will have toincrease by $8,000 in the first year. Inventory will remain at thislevel until the end of the project in 4 years, at which time itwill drop back to its original level. The tax rate is 40% and thecost of capital is 10%. Should the firm proceed with thisproject?