Reference no: EM133073743

A firm is considering a project that requires no new purchases of equipment. Instead, they will re purpose existing machines that they already own but are no longer needed elsewhere in the business. These machines were originally bought for $1 million 8 years ago and were depreciated straight line over that period to a book value of $0 today. Their market value is estimated to be $150,000. The machines require a new investment of $20,000 to equip them for their new task and this cost will be depreciated straight-line over a 5 year period. The new project is expected to generate revenues of $96,000 per year for four years. Operating expenses will be 55% of revenues. The project requires an initial investment in working capital of $6,000. Further investments in working capital will be needed as follows: an additional $1,000 at t=1, $2,500 at t=2, and $2,200 at t=3. It is assumed that all of the investments in working capital made over t=0,1,2,3 will be completely recovered at the end of the project. The corporate tax rate is 34%. At t=4, the market value of the equipment is expected to be $98,000 but the company is not planning to sell the equipment. If the cost of capital is 15%, should the investment be undertaken? Support your answer with the project's NPV