Johnson Chemicals Is Considering an Investment Project

question 61

Multiple Choice

Johnson Chemicals is considering an investment project.The project requires an initial $3 million outlay for equipment and machinery.Sales are projected to be $1.5 million per year for the next four years.The equipment will be fully depreciated straight-line by the end of year 4.Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales.The equipment can be sold for $400,000 at the end of year 4.Johnson Chemicals also needs to add net working capital of $100,000 immediately.The net working capital will be recovered in full at the end of the fourth year.Assume the tax rate is 40% and the cost of capital is 10%.
What is the NPV of this investment?

• A) $89,290
• B) $80,199
• C) $189,482
• D) $72,909

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