Question 4 (1 point)
All questions of Homework 5 are based on the following capital budgeting.
You are financial managers of a company that produces printers. You will use NPV method to evaluate a 10-
year project that produce and sell a new model. The WACC is 5% and the tax rate is 21%.
1. The project needs a set of machines that costs $5 million. The company uses a 10-year straight-line
depreciation method so that 100% of fixed assets will be depreciated by year 10. There is no salvage value of
the fixed asset.
2. In the past two years, the company had spent $800,000 in R&D to develop the new model.
3. The project will be partially financed with debt, and the interest to be paid every year would be $200,000.
4. If the new project is taken, it is expected that the investments in inventory will increase by $1,500,000,
account receivable will increase by $1,500,000, account payable increases by $600,000, accruals decreases
by $100,000. Suppose these changes will reverse at the end of the project.
5. The net sales from this project will be $8 million per year, of which 20 percent will be from the lost sales
of existing products. The costs of the production will be 45% of the net sales.
6. The project will require hiring a new manager, who will cost $100,000 per year. In addition, the firm needs
to rent a new office for $50,000 a year.
7. Currently, the overhead of the firm is $500,000. And the accounting department will allocate 20% of this
amount to the new project.
How much is the NPV of the project?
$10,937,932
$10,820,997
$11,088,235
$ 9,476,234
$11,011,017
