Question

1. Blue Ribbon, Inc., is considering a new two-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset actually falls into the three-year MARCRS class (as shown in the Table below). Suppose that at the end of the project, the fixed asset will have a market value of $2 million. The project is estimated to generate $4 million in annual sales, with costs of $2 million. The project also requires an initial investment in net working capital of $500,000 and the investment in net working capital will be fully recovered at the end of the project. If the tax rate of the firm is 21% and the required return on the project is 15%, what is the project’s NPV? Should the firm accept this project?

Modified ACRS (MACRS) Depreciation Schedule

Year	Property Class Three-Year
1	33.33%
2	44.45
3	14.81
4	7.41
Sum	100%

Answer 1