Calculating NPV Howell Petroleum is considering a new project that compliments i

Question

Calculating NPV Howell Petroleum is considering a new project that compliments its existing business. The machine required for the project cost $3.9 million. The marketing department predicts that sales related to the project will be $2.35 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $150,000 immediatly. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 35 percent. The required rate of return for Howell is 13 percent. Should Howell proceed with the project? Show all steps.

Explanation / Answer

Total Cost of project -3900000 Sales Each year 2350000 Profit & loss Each year 0 1 2 3 4 Sales 2350000 2350000 2350000 2350000 COGS 587500 587500 587500 587500 Depreciation 975000 975000 975000 975000 Operating Profit 787500 787500 787500 787500 Tax 275625 275625 275625 275625 PAT 511875 511875 511875 511875 Casflow Statement Initial Investment -3900000 WC Investment -150000 PAT + Deprecation 1486875 1486875 1486875 1486875 Workig capital returned back 150000 Total cashflows -4050000 1486875 1486875 1486875 1636875 NPV 411,207.84

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