This year your company is considering an investment to enhance manufacturing. The incremental earnings before interest and taxes (EBIT) will be $175,000 in year 1 and grow by 6.5% per year for each of the next 5 years. The projects initial investment cost is $600,000 that will be depreciated completely via straight line method over 5 years to 0$.
Despite the investment being fully depreciated (0$ book value) assume that the investment will have a market salvage value of $125,000 after the 5 years. To support manufacturing the project will require working capital of 22% of EBIT per year. Additionally the firm pays an effective tax rate of 35%.
a) Show Project Cash Flow for the next five years of the project
b) Assuming a discount rate of 15% would you recommend the project, why/why not?
c) Would your recommendation be the same if the project's initial cost was doubled to $1,200,000?