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Thinking about expanding its facilities

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Sabina Bookstores is thinking about expanding its facilities. In considering the expansion, Sabina's finance staff has obtained the following information; the expansion will require the company to purchase initially (t=0) $5 million of equipment (this amount includes shipping and installation). The equipment will be depreciated over the following four years at the following rates (3 year MACRS class) t=1 33% t=2 45% t=3 15% t=4 7%. The expansion will require the company to increase its net operating working capital by $500,000 today (t=0). This net operating working capital will be recovered at the end of four years (t=4). The equipment is expected to have a salvage value of $2 million at the end of four years. The company's operating costs, excluding depreciation, are expected to be 50% of the company's annual sales. The expansion will increase the company's dollar sales. The projected increase all relative in current sales are Year 1: $3 million Year 2: $3.5 million Year 3: $4.5 million Year 4: $4 million. The company's tax rate is 40% and the other divisions are expected to have a positive tax liabilities throughout the project's life. The discount rate is 10%. What is the NPV?

Reference no: EM131131355

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