Patty Marlene Ski Rope Dog Leash Manufacturing Company, LLC (PMWW) has researched and sees a new opportunity. Linus Louis, CRO (chief research officer) has seen that there is a trend in urban goat pets and knows that these goats like to wear colorful jackets.
Since PMWW is not really in the garment business they will need to buy sewing machines at a cost of $47,000. The IRS considers these 3 year assets so according to MACRS the depreciation would be
Year 1 33.33%
Year 2 44.45%
Year 3 14.81%
Year 4 7.41%
Additionally, the current yield on 5 Year TBills is .78. The Market Risk Premium is 2.5% and PMWW's beta is 1.2. The risk, however, on this project will be 2% higher than their normal Required Rate of Return.
PMWW foresees net revenues not including depreciation for this project as:
Year 1 $12,000
Year 2 $12,250
Year 3 $22,372
Year 4 $15,100
After year 4 the growth will be a steady 1.75% due to the fact that people will realize that goats smell and eat everything that they can find so only true goat lovers will keep their goats warm while others will have goat roasts. PMWW reluctantly pays a40% tax rate.
Other than the investment in machines PMWW will need to increase these items to get this project started
Increase in inventory $ 8,000
Increase in labor $12,000
Increase in accounts payable $ 4,200
So, PMWW has come to you to determine if they should do this project or not and you said "sure, I can do an NPV analysis and let you know."
Please show the details of the NPV analysis that you will present to PMWW.