Reference no: EM131575511

Suppose a businessman has an idea to build an electric motor cycle. He currently owns property worth $1 million; the new plant can be built for $2 million and equipment will cost $2million plus installation costs of $300,000.   Assume the plants and equipment can be built and operational on day one.   He expects there to be working capital needs which will be $2 million starting after one year and staying flat for 5 years.    He expects motorcycle after-tax cash flows of $1 million in the first year, $2 million in the second year, and $3 million for years 3,4,5. This project will replace an existing facility making go carts which can be sold for $100,000 with a tax value of 50,000, after tax cash flows of 200,000 per year, and a hypothetical liquidation value at the end of 5 years of 20,000 with no tax value. Assume all cash flows occur on the last day of the year for simplicity. After 5 years, Elon gets bored and liquidates the business. Assume the working capital is liquidated and the PP&E is sold for $500,000 (assume it had been depreciated to $400,000. Assume a tax rate of 35%. Assume Elon’s cost of capital is 16%. Using the capital budgeting method, is this project financially worthwhile?