(Incremental cash flows and NPV) The Miller Corporation is considering a new product.
An outlay of $6 million is required for equipment to produce the new product, and additional net working capital of $500,000 is required to support production and marketing. The equipment will be depreciated on a straight-line basis to a zero book value over eight years.
Although the depreciable life is eight years, the project is expected to have a productive life of only six years, and it will have a salvage value of zero at that time (removal cost = scrap value).
Revenues minus expenses for the first 2 years of the project will be $5 million per year but, because of competition, revenues minus expenses in years 3 through 6 will be only $3 million.
The cost of capital for this project is 16%, and the relevant tax rate is 35%. Compute the NPV of Miller's new product.