Answer to Question #33089 in Finance for Shikha

Question

A smooth saleperson comes to visit your office with a proposal to sell your firm some new machinery to install in your vacant warehouse building on the property that has no alternative use. The salesperson claims that this technology produces products that should provide you with revenues next year of $7 million with a cost of goods to be $5 million. Both of these are expected to grow at a rate of 15% per year till year 6. Your firm faces a 35% tax rate, a 12% discount rate and you can depreciate your new investment using the straight line method over the six years, at which point the value of the venture moving forward will be $2 million. (This $2 million is the terminal value that is in year 6 dollars and is the PV of all cash flows year 7 and beyond.) The capital expenditure of this project is $6M. What is the NPV of the project? Assume that you have no significant working capital costs