The fixed assets for a 5-year capital budgeting project will cost $7,000,000. The assets have a 7-year depreciable life, and the estimated salvage value at the end of the 5-year project is $2,400,000. Use straight line depreciation.
The project is expected to generate sales revenue of $3,300,000 each year for five years, and annual project operating costs (excluding depreciation) would be $1,680,000. An investment of $300,000 in net working capital will be required at the beginning of the project, and it will be recovered at the end of the project.
The firm is most likely to issue $7,000,000 in bonds to pay for the project, and the coupon rate would be 6% annually. The firm’s income tax rate is 35 percent. Assume a 10 percent weighted average cost of capital. Estimate the project cash flows, and compute Net Present Value.
Should the project be accepted?