Gateway Communications is considering a project with an initial ?xed asset cost

Question

Gateway Communications is considering a project with an initial ?xed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the ?rm requires a 14 percent rate of return? Why or why not? Please explain to me how to solve this.

Explanation / Answer

B. No; The NPV is -$87,820.48.

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