Reference no: EM132754945

Problem 1: Cup Inc. is interested in developing a new dish. The sales will be $350 million per year for 5 years. Operating costs are $290 million per year for 5 years. The project requires an additional machine that costs $180,000,000 to be depreciated to a zero book value on a straight-line basis over 5 years. The machine can be sold for $20 million at the end of year 5 (salvage value). The project will generate $3,000,000 per year in interest expense. The net operating working capital per year is equal to 2% of the next year's sales, so net operating working capital is returned at the end of year 5. Operating costs do not include depreciation and interest expenses. The cost of capital is 7% and the tax rate is 25%. The project ends after 5 years, and there is no horizon value. Find the net present value. Should they develop the new dish?