Capital Budgeting Investment Decisions

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a. If the project is undertaken, at t = 0 the company will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000.  This net operating working capital will be recovered at the end of the project’s life (t = 4).
b. If the project is undertaken, the company will realize an additional $600,000 in sales over each of the next four years (t = 1, 2, 3, and 4). The company’s operating costs (not including depreciation) will equal $400,000 a year.
c. The company’s tax rate is 40%.
d. At t = 4, the project’s economic life is complete, but it will have a salvage value (before-tax) of $50,000.
e. The project’s WACC is 10%.
f. The company is very profitable, so any accounting losses on this project can be used to reduce the company’s overall tax burden.
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