Calculation of net present value

Reference no: EM1312856

Calculation of net present Value

Maple Media is considering a proposal to enter a new line of business. In reviewing the proposal, the company's CFO is considering the following facts:

• The new business will require the company to purchase additional fixed assets that will cost $600,000 at t = 0. For tax and accounting purposes, these costs will be depreciated on a straight-line basis over three years.

• At the end of three years, the company will get out of the business and will sell the fixed assets at a salvage value of $100,000.

• The project will require a $50,000 increase in net working capital at t = 0, which will be recovered at the end of the life of the new business.

• The company's tax rate is 35 percent.

• The new business is expected to generate $2 million in sales each year. The operating costs, excluding depreciation, are expected to be $1.4 million per year.

• The project's appropriate discount rate is 12 percent.

What is the project's net present value? Should the project be accepted or rejected?

Reference no: EM1312856

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