Question

A company, which has a tax rate of 25%, is considering investing in an extension of its main operating line, a project that would require an investment of $1.2 million and would generate the following net cash flows over the next 4 years:

• Year 1: $400,000

• Year 2: $550,000

• Year 3: $800,000

• Year 4: $600,000

The expected rate of return for projects of that nature is 12%, and the company usually likes to recoup its investment within 3 years. Assess the financial viability of this investment, and justify your decision. Reminder: PV = FV / (1+r) ^ t

Answer #1

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