Owls Company is considering opening a new production facility in Philadelphia, Pennsylvania. In deciding whether to proceed with the project, the company has accumulated the following information:
The estimated up-front cost of constructing the facility at t = 0 is $10 million. For tax purposes the facility will be depreciated on a straight-line basis over 5 years.
The company plans to operate the facility for 4 years. It estimates today that the facility’s salvage value at t = 4 will be $3 million.
If the facility is opened, Qwls Company should increase its inventory by $4 million at t = 0. In addition, its accounts payable will increase by $3 million at t = 0. The company’s net operating working capital will be recovered at t = 4.
If the facility is opened, it will increase the company’s sales by $7 million each year for the 4 years that it will be operated (t = 1, 2, 3, and 4).
The operating costs (excluding depreciation) are expected to equal $3 million a year.
The company’s tax rate is 40 percent.
The project’s cost of capital is 12 percent.
What is the project’s net present value (NPV)? What is the project’s MIRR?