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 $3.94 million. The marketing department predicts that sales related to the project will be $2.64 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 $290,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 40 percent. The required rate of return for the project is 15 percent.

What is the value of the NPV for this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.94 million. The marketing department predicts that sales related to the project will be $2.64 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 $290,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 40 percent. The required rate of return for the project is 15 percent.

Explanation / Answer

NPV details Year 0 Year 1 Year 2 Year 3 Year 4 Investment in Machine       (3,940,000) Investment in Net Working Capital           (290,000)            290,000 Sales        2,640,000        2,640,000         2,640,000         2,640,000 Less COGS & Operating expenses       (660,000)         (660,000)          (660,000)          (660,000) Less Dedpreciation       (985,000)         (985,000)          (985,000)          (985,000) Income before Tax          995,000           995,000             995,000            995,000 Tax @40%       (398,000)         (398,000)          (398,000)          (398,000) Post Tax Income          597,000           597,000             597,000            597,000 Add back depreciation          985,000           985,000             985,000            985,000 Net Cash fl;ow(including NWC)       (4,230,000)      1,582,000        1,582,000         1,582,000         1,872,000 PV factor @15%                          1            0.8696              0.7561               0.6575               0.5718 PV of Cash Flows       (4,230,000)      1,375,652        1,196,219         1,040,191         1,070,322 NPV =Sum of PV of Cash flows= $   452,384.21 So NPV of the Project is $452,384.21

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