Reference no: EM132683115

Question - Fila Bookstores is considering a major expansion of its business.

The details of the proposed expansion project are summarized below:

The company will have to purchase RM400,000 in equipment at t=0.

The project will have an economic life of four years.

The cost can be depreciated on a MACRS 3 year basis, 33% in year 1, 45% in year 2, 15% in year 3 an 7% in year 4.

At t=0, the project requires inventories increase by RM40,000 and accounts payable increase by RM10,000. The change in Net Operating Working Capital is expected to be fully recovered at t=4.

Salvage value at year 4 is expected to be RM0.

The company forecasts that the project will generate RM800,000 in sales the first 2 years (t=1 and 2) and RM500,000 in sales during the last two years (t=3 and 4).

Each year the project's operating costs excluding depreciation is expected to be 60% of sales revenue.

The company tax rate is 28%.

The project's cost of capital is 8%.

Required -

a) Calculate the project initial outlay

b) What is the NPV of the proposed project?

c) Should fila Bookstores proceed with the project?