Your company is considering a new project that will an initial investment in buying a production line of $250,000 and th

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Your company is considering a new project that will an initial
investment in buying a production
line of $250,000 and the production line will last for four years.
Assume that the production line
will be depreciated straight line to a salvage value of $10,000 at
the end of year 4. However, the
new project does not require investment in research and development
(R&D). The new project
will generate sales revenue of $120,000 each year and the annual
COGS will be 30% of sales.
The project will require $20,000 in net working capital (NWC)
upfront (year 0), which will be
fully recovered at the end of year 4. You company also needs to
attribute $30,000 of selling,
general and administrative expenses to the project at the end of
each year.
Suppose your company is a levered company. It has 70 million common
shares outstanding,
trading for $10 per share. It also has $140 million in outstanding
debt. The debt cost of capital is
8%, and the corporate tax rate is 30%. Suppose that your firm’s
stock has a beta of 0.85. If the
risk-free interest rate is 4% and the expected return from the
S&P 500 market index is 12%
Suppose this project is an average-risk project. Calculate the
NPV of this project.