Question

n analyzing a new potential business MacDonald Publishing’s financial staff is estimating an initial capital expenditure of $5.5 million. This equipment will be depreciated according to the MACRS 3 year class life and will have a market value of $500,000 after four years. If MacDonald goes ahead with the new business, inventories and accounts payable will increase by $300,000 each. The new business is expected to have an economic life of four years and is expected to generate annual sales of 4.5 million and incur operating costs (excluding depreciation) of 2.2 million annually. If the company's tax rate is 40 percent and the required return is 10 percent, calculate the expected NPV of the new business. Question 10 options:

Answer 1

Increase in Inventory and increase in accounts payable cancel out each other.