Latvian Corporation Saldejums SIA is considering a new project that complements its existing business. The...
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Latvian Corporation Saldejums SIA is considering a new project that complements its existing business. The machine required for the project costs $3.8 million. The marketing department predicts that sales related to the project will be $2.4 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated down to zero for tax purposes over its four-year economic life using the straight-line method. However, it is expected that the machine could be sold for the value of 10% of the initial investment. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. The company also needs to make additional net working capital related investments in the amount of 10% of additional sales immediately. The additional investment into net working capital will be recovered in full at the end of the projects life. The corporate tax rate on profits is 25 percent. The required rate of return for the Saldejums SIA is 16 percent. Should the company proceed with the project (based on NPV and IRR)? Show all your calculations.
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