Question

Consider a project to supply the highway department of your state with 25,000 tons of rock salt annually to drop on winter roads in your county. You will need an initial $1,250,000 investment in processing equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $200,000 and that variable costs should be $90 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. The marketing department estimates that the state will let the contract at a selling price of $120 per ton. The engineering department estimates you will need an initial net working capital investment of $90,000. You require a 14 percent return and face a tax rate of 38 percent on this project.

Answer 1