Exercise
The Forest Green Company is considering purchasing additional equipment that would have an initial cost of $400,000. They estimate it would add $220,000 to pre-tax revenues and variable operating expense (before taking account of depreciation) per year of 40%, for the first 4 years. In Year 5, they will cease production, and therefore will have no additional revenues or ongoing operating costs, but will incur special shutdown costs of $42,000 (aside from depreciation).
The packaging machine will be depreciated on a straight-line basis, over 5 years, and will have no salvage value (ignore the MACRS depreciation methodology for this problem.)
Assuming a 21% marginal tax rate, and a 7% WACC, calculate the NPV of this investment. Do you recommend this project? Why?
