Project Cash Flow/Net Present Value Problem

The fixed assets for a three-year capital budgeting project will cost $3,500,000. Additionally, shipping costs will be $40,000. Modification and installation costs will total $360,000. The assets are in the 3-year MACRS class. A salvage value for the assets at the end of three years is estimated at $210,000.

The project is expected to generate sales revenue of $2,650,000 each year for three years, and annual project operating costs (excluding depreciation) would be $840,000. An investment of $300,000 in net working capital will be required at the beginning of the project, and it will be recovered at the end of the project. The firm’s income tax rate is 35 percent. Assume a 12 percent weighted average cost of capital.

Estimate the project cash flows and compute Net Present Value. Should the project be accepted?

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