Problem
St Lucia Riverbank Ltd. is considering a new project that requires the purchase of a machine to make its timber-based products. The machine costs $300,000 upfront and will be fully depreciated on a straight-line basis to zero over the 4 years. With this machine, sales revenue will be $200,000 next year. After that, it will grow at 10% per year for the remaining years. Operating expenses account for 50% of the sales revenue. The project requires an investment of $10,000 in working capital, which will be fully recovered at the end of the project. The company is in the 35% tax bracket. The cost of capital for St Lucia Riverbank is 10%.
i. Calculate NOPAT.
ii. Calculate net cash flows.
iii. Calculate NPV. Should you accept or reject the project?
iv. Calculate Payback Period. Should you accept or reject the project if management requires a payback period cutoff of 2 years?
Show your workings and round your final answers to 2 decimal places.