Problem:
General Electric is considering the investment in a capital project. The initial cost in year 0 is $100,000 to be depreciated straight line over 5 years to an expected salvage value of $5,000. The firm?s tax rate is 35% and it has an 11% cost of capital. For this project an additional investment in working capital of $8,000 is required and it will be recovered at the end of the project?s life. The project will generate additional revenues of $45,000 in year 1 and these revenues will grow annually at a rate of 6%. The additional expenses of the project will be $15,000 in year 1 and will grow annually at 5%.
a. Prepare a table determining the after-tax net cash flows for this project for years 0 thru 5. Show all work.
b. Determine the NPV for this project. Show all work.
c. Make a recommendation to the CFO about this project. Strongly defend your recommendation.