how to calculate NPV

Question

Peterson Printing Corporation (PPC) is considering a proposal to offer a new specialized product for which the Company will need to purchase a new press. In reviewing the proposal, the company’s CFO (Nancy), is considering the following facts:

♦ The new business will require the company to purchase additional fixed assets that will cost \$1,225,000 at t = 0.

♦ For tax and accounting purposes, these costs will be depreciated on a straight-line basis over three years. PPC always excludes salvage values from its depreciation calculations because they are difficult to predict.

♦ At the end of three years, the company will no longer offer the new product and will sell the printing press at a salvage value price of exactly \$20,000.

♦ The project will require a \$100,000 increase in net operating working capital at t = 0, which will be recovered at this same value at t = 3.

♦ The company’s marginal tax rate is 35%.

♦ The new business is expected to generate a nominal \$2 million in sales each year (at t = 1, 2, and 3). The operating costs (excluding depreciation) are expected to be \$1.12 million each year. No inflation is expected.

PPC’s marginal cost of debt is 9%, and its overall WACC is 15%. What is the net present value

(NPV) of the printing press project, and should Nancy accept it?

a. Yes do the deal because NPV is \$381,615

b. Yes do the deal because NPV is \$571,921

c. No, don’t do the deal because NPV is -\$381,615

d. No, don’t do the deal because NPV is -\$571,921

e. none of the above.

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