Reference no: EM133087133

Question - A company is considering a new 3 year expansion project that requires an initial fixed asset investment of $4,500,000. The fixed asset will be fully depreciated straight line over 3 years. The new project will generate $2,600,000 in new annual sales with corresponding new variable expenses of $600,000 annually.

The project requires an initial investment in net working capital of $300,000. At the end of the 3 year period, the company will sell this fixed asset for $500,000 before tax. The company has a policy of not subtracting any salvage value from the cost of the fixed asset in determining depreciation expense. The company has a tax rate of 35% and its required rate of return for this project is 12%.

An extensive marketing and research study completed 3 years ago cost the company $400,000. The study concluded that the company should not pursue the project.

1. What is the Year 3 Annual Cash Flow?

a. Between $2,200,000 and $2,300,000

b. Between $2,300,000 and $2,400,000

c. Between $2,400,000 and $2,500,000

d. Between $2,500,000 and $2,600,000

e. Between $2,600,000 and $2,700,000

f. Less than $2,200,000

2. Should the company make the investment?

a. No because the NPV is less than 0

b. Yes because the NPV is between $1 and $20,000

c. Yes because the NPV is between $20,000 and $40,000

d. Yes because the NPV is between $40,000 and $60,000

e. Yes because the NPV is between $60,000 and $80,000

f. Yes because the NPV is greater than $80,000