Blue Betty is considering an investment of $8 million in plant and equipment. Sales are expected to be $14 million in years 1 and 2. Cost of goods sold (COGS) is expected to be 40% of sales, and fixed costs are $3M per year. Depreciation will be straight-line over 2 years to a zero-book value. There is no net operating working capital. The corporate tax rate is 20%. a. Calculate the net present value (NPV) for a 12% cost of capital. b. Should Blue Betty make the investment? Why or why not?
Added by Jermaine B.
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** - Sales in years 1 and 2: $14 million - Cost of Goods Sold (COGS): 40% of sales \[ \text{COGS} = 0.40 \times 14 \text{ million} = 5.6 \text{ million} \] - Fixed Costs: $3 million Show more…
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