Howell Petroleum is considering a new project that complements its existing busi

Question

Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $1.78 million. The marketing department predicts that sales related to the project will be $1.27 million per year for the next five years, after which the market will cease to exist. The machine will be depreciated down to zero over its five-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 23 percent of sales. Howell also needs to add net working capital of $165,000 immediately. The additional net working capital will be recovered in full at the end of the project

Explanation / Answer

NPV = -$1,950,000 + $693,750(PVIFA16%,4) + $150,000/1.164 NPV = $74,081.48

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