Howell Petroleum is considering a new project that complements its existing busi

Question

Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $1.66 million. The marketing department predicts that sales related to the project will be $1.16 million per year for the next five years, after which the market will cease to exist. The machine will be depreciated down to zero over its five-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 29 percent of sales. Howell also needs to add net working capital of $156,000 immediately. The additional net working capital will be recovered in full at the end of the project

Explanation / Answer

Hi, If you like my answer, please rate my answer first and according to my answer...that way only I can earn points. Thanks Initial cost = $1660000 + $156000 = $1816000 Depreciation each year = $1660000 / 5 = $332000 Net income each year = ($1160000 *(1-29%) - $332000) * (1-35%) = $319540 After tax cash flow = $319540 + $332000 = $651540 Year Cash Flow Year 0 -1160000 Year 1 651540 Year 2 651540 Year 3 651540 Year 4 651540 Year 5 807540 (Working capital recovered) NPV = 1157811.09

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