Mills Mining is considering the purchase of additional equipment. The proposed project has the following? features:
The equipment has an invoice price of? $390,000 and will cost? $40,000 to modify for company use. Shipping will cost? $10,000. The company spent? $10,000 last year analyzing 5 competing brands of equipment before deciding that this brand was the best for their purposes. The equipment will be depreciated as a? 3-Year MACRS asset with the following? rates: Year 1? – 33%, Year 2? – 45%, Year 3? – 15%, and Year 4? – 7%.
?• If the project is? undertaken, the company will need an increase in net working capital of? $40,000. This net working capital will be recovered at the end of the?project’s three year life.
?• If the project is? undertaken, the company will realize an additional? $500,000 in sales over each of the next three years. The? company’s operating costs? (excluding depreciation) will be? $200,000 higher over each of the next three years.
?• If the project is? undertaken, old equipment that has been fully depreciated can be sold for? $20,000. If the project is not? undertaken, the old equipment will last 3 more? years, at which time its salvage value will be zero.
?• The? company’s tax rate is 40 percent.
?• At the end of year? three, the equipment will have a salvage value of? $90,000.
?• The? project’s cost of capital is 10 percent.
The net investment? (NINV) required to fund this project is
A. ?$468,000
B. ?$490,000
C. ?$390,000
D. ?$480,000