Reference no: EM132746030

Question - Felix and Marlow are planning to invest in a Go Advertising project. The marginal tax rate is 27% and the company tax rate is 31%. Due to their lack of finance expertise, they have asked your assistance in determining whether they should invest in Go Advertising or not.

They have provided you with the following information:

The project has a life of 6 years;

The equipment cost $260,000 with an additional installation cost of $15,000;

The equipment will be sold at the end of project life for $45,000;

Straight line method is used in calculating depreciation;

The Tax Authority has given this type of equipment an effective life of 5 years;

Sales for the first year will be $75,000 and sales are expected to grow at 6% pa for each year of the project;

Cost of goods sold is 15% of sales each year;

Working capital will be 5.5% of sales revenues for each year. The working capital investment has to be made at the start of each period. All working capital will be recovered;

Marketing costs will be 2.5% per annum;

The current market salary is $25,000 per annum. They will need to hire 3 employees.

The hurdle rate is 11%.

Required -

A. Calculate NPV for GO Advertising project.

B. Advice Felix and Marlow on the acceptability of Go Green project.