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Evaluation of a capital project

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Reference no: EM133119892

Evaluation of a Capital Project

A risk-free project requires an initial investment in equipment of $50,000.

  • The project is expected to produce sales revenue of $60,000 the first year; this revenue will increase by 5% per year over the next two years.
  • Manufacturing costs are estimated to be 65% of the sales.
  • The asset will be depreciated straight line to a zero salvage value. The corporate tax rate is 40%.
  • The project requires an investment in working capital. Specifically, at the beginning of the project, $4,000 of working capital is required; thereafter, working capital is projected to be 15% of revenue. The investment in working capital will be recovered at the end of the third year.
  • At t = 3, the company plans to sell the equipment for $7,000.

Should the investment be undertaken? Use Excel to value the project. Use today's U.S. Treasury Yield Curve to determine the discount rates.

Reference no: EM133119892

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