Reference no: EM1312968
Explain Capital budgeting involves calculation of net present value
Mills Mining is considering an expansion project. The proposed project has the following features:
1. The project has an initial cost of $500,000--this is also the amount which can be depreciated using the following depreciation schedule:
Year Depreciation Rate
1 33%
2 45
3 15
4 7
2. If the project is undertaken, at t = 0 the company will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. This net operating working capital will be recovered at the end of the project's life (t = 4).
3. If the project is undertaken, the company will realize an additional $600,000 in sales over each of the next four years (t = 1, 2, 3, 4). The company's operating cost (not including depreciation) will equal $400,000 a year.
4. The company's tax rate is 40 percent.
5. At t = 4, the project's economic life is complete, but it will have a salvage value of $50,000.
6. The project's WACC = 10.5 percent.
What is the project's net present value (NPV)?
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