Question

Kuzzins Fertilizer Inc. is considering buying a machine to produce its new product, the Smelly Spreader. The machine has a 3-year life and a cost of $425,000. This total does not include marketing study costs of $25,000 expensed four months ago. The project will produce sales of $364,000 for each of the 3 years. Cost of the materials and all operations-related expenses to make the final product will be $183,000 each year. The equipment is depreciated over the life of the project using the straight-line method. The spreader has a market value of $42,000 in year 3. The tax rate is 30%. The project will immediately require $20,000 in extra inventory for spare parts and accessories. The firm's WACC is 7.8%, and its cost of debt is 6%. The firm may have to issue debt to finance this project.

1. ) Determine the cash flows for each year of the project, including year 0.

2.) Calculate the net present value of the project.

3.) Is the project feasible?

Answer 1

1 & 2). cash flow and NPV provided in the table above.

3). The project is feasible as the NPV of the project is positive.