Reference no: EM132860619

Question - AWS is contemplating setting up a manufacturing plant to produce a new line of radar systems. This is a five-year project. The company bought some land three years ago for $4.5 million in anticipation of using it for waste chemicals. If the land were sold today, the net proceeds would be $5.5 million after taxes. In five years, the land will be worth $5.8 million after taxes. The company wants to build its new manufacturing plant on the land; The plant will cost $21.2 million to build.

AWS's tax rate is 25%. The project requires $825,000 in initial net working capital investment to get operational. All net working capital is recovered at the end of the project. AWS uses straight-line depreciation. At the end of year 5, the plant can be scrapped for $2.4 million. For this plant, AWS will incur $3.6 million in annual fixed costs. The plan is to manufacture 13,500 system per year and sell them at $10,800 per machine; the variable production costs are $9,000 per machine.

Question - What is the expected net present value of the investment? Show your cash flow development, by year, and the steps to arrive at your solution.