Having no luck with a problem for my finance homework. Anyone walk me through it?
Packers Inc. is considering a new project that complements its existing business.
The machine required for the project costs $1.8 million. The marketing
department predicts that sales related to the project will be $1.1 million per year
for the next 4 years, after which the market will cease to exist. The machine will
be depreciated down to $0 (book value) over its 4-year life using the straight-line
depreciation method. Cost of goods sold and operating expenses related to the
project are predicted to be 25% of sales. Packers Inc. also needs to add net
working capital of $150,000. The corporate tax rate is 35%. The required return
for Packers is 16%. Answer the following questions;
(1) Should Packers Inc. proceed with this project?
(2) Suppose that, at the end of the project’s 4-year economic life, the project can
now be sold at market value of $400,000. Should Packers Inc. proceed with
(3) Calculate the equivalent annual cost (or value) for this project.