Cash Flow Estimation Salvage Value:
XYZ Corporation is considering an expansion project. To date they have spent $51,400 investigating the viability of the project and have decided to proceed. The CEO of XYZ spent $22,100 last year on his business trip to New York where he discussed about the proposed new project with the board members. The company spent $55,000 on a marketing study before its current analysis regarding whether to accept or reject the project. The proposed project will cost $990,000.00. It will also cost additional $14,600.00 for shipping and installation. The project will be depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate the machine and equipment which are 33.33%, 44.45%, 14.81%, and 7.41%.
If the project is undertaken the company will need to increase its inventories by $44,100, and its accounts payable will rise by $11,300. The company will realize an additional $874,450.00 in sales over each of the next three years. The company's operating costs (not including depreciation) will increase by $404,702.00 a year. Both sales and the operating cost are expected to grow 4.45% annually during the life of the project. The company's tax rate is 31.00%. At t = 3, the project's economic life is complete, but it will have a salvage value (before-tax) of $97,500.00 after three years. The project's WACC is 9.25%. What is the project's net present value (NPV)?