Question

# FIN3610, Inc., is planning to set up a new manufacturing plant in New York to produce...

FIN3610, Inc., is planning to set up a new manufacturing plant in New York to produce safety tools. The company bought some land six years ago for \$4.3 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would sell for \$4.6 million on an after-tax basis. In four years, the land could be sold for \$4.8 million after taxes. The company hired a marketing firm to analyze the market at a cost of \$250,000. Here is the summary of marketing report: We believe that the company will be able to sell 5,600, 6,300, 7,200, and 5,900 units each year for the next four years, respectively. We believe that \$550 can be charged for each unit. We believe at the end of the four-year period, sales should be discontinued. The company believes that fixed costs for the project will be \$615,000 per year. Variable costs are \$462,000, \$519,750, \$594,000, 486,750 each year for the next four years, respectively. The equipment necessary for production will cost \$2.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for \$450,000. Net working capital of \$325,000 will be required immediately. The company has a 21 percent tax rate, and the required return on the project is 9 percent.

What is the project`s NPV? Should accept or reject the project?

 NPV is - \$7,100,000 and should reject the project. NPV is \$6,323,373.03 and should accept the project. NPV is \$5,870,225 and should accept the project. NPV is - \$1,101,626.97 and should reject the project. NPV is \$2,780,897.40 and should accept the project.

Hence correct option is NPV is \$2,780,897.40 and should accept the project.

#### Earn Coins

Coins can be redeemed for fabulous gifts.