The Elkton Company is considering a new project that requires an initial investment of $24,000,000...
60.1K
Verified Solution
Link Copied!
Question
Finance
The Elkton Company is considering a new project that requires an initial investment of $24,000,000 to build a new plant and purchase equipment. The investment will be depreciated using the straight line method over 10 years. The new plant will be built on some of the company's land which has a current, after-tax market value of $5,000,000. The company will produce widgets at a cost of $130 each and will sell them for $420 each. Annual fixed costs are $500,000. Sales (in units) are expected to be 150,000 each year for the next 10 years, at which time the project will be abandoned. At that time, the plant, equipment, and land is expected to be worth $13,400,000 before tax. The company will need to purchase $1,000,000 worth of inventory & will recapture that investment at the end of the 10thyear. No other investments in inventory are anticipated. The cost of capital is 13% and the company's marginal tax rate is 35%. Pleased do the following:
a) Based on the NPV Should the project be accepted?
b) Draft a short memo (paragraph or two) explaining your analysis and recommendation to your supervisor.
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
