Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.82 million. The marketing department predicts that sales related to the project will be $2.52 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero over its four-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $170,000 immediately. The additional net working capital will be recovered in full at the end of the project's life. The corporate tax rate is 40 percent. The required rate of return for the project is 14 percent. What is the breakeven price of the machine? (What price of the equipment will make the NPV equal zero?)
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The machine costs $3.82 million and will be depreciated over four years, so the annual depreciation is $3.82 million / 4 = $0.955 million. Show more…
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