Assume that your company is considering a 4-year project and that the proposed project has the following features:
The project has an initial cost of $2,000,000 and will be depreciated using MACRS and a 3-year class life (therefore, it will be depreciated over 4 years, at a rate of 33%, 45%, 15%, and 7%, respectively).
The company will need to increase its inventories by $120,000 at Year 0, and its accounts payable will also rise by $40,000 at Year 0. This net operating working capital will be recovered at the end of the project’s life, Year 4.
If the project is undertaken, the company will realize incremental EBIT of $800,000 over each of the next four years (Years 1-4). The company’s incremental operating cost (not including depreciation) will equal $300,000 a year.
The company’s tax rate is 40 percent.
At Year 4, the project’s economic life is complete, but it is expected to have a before-tax salvage value of $100,000.
The project’s WACC = 10 percent.