Determining the investment capital for the npv calculation

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Case - Your team has just been hired by HP Inc in its capital budgeting division. Your first assignment is to determine the net cash flows and NPV of a proposed new project. HP is planning to develop a new type of smartphone, which should be able to compete with the latest Apple and Samsung models on the market.

Over the last two years, HP has already spent $150 million on R&D to optimize the design of the new smartphone. If the company would decide to actually go ahead with the project, the development and production of the new phone will initially require an investment equal to 42% of the company's current net property, plant, and equipment (PPE), as per the fiscal year ended 31 October 2020. The project will then require an additional investment equal to 34% of the initial investment after the first year of the project. The smartphone is expected to have a life of five years. The expectation is that the property, plant, and equipment can be sold at the end of the project with a liquidation value of about 10% of the initial investment. The company will borrow $100 million to (partly) finance this project, at an interest rate equal to the average cost of debt of the company.

When determining the INVESTMENT CAPITAL for the NPV calculation, do I include the 34% additional investment.

Reference no: EM133005128

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