You are financial managers of a company that produces printers. You will use NPV method to evaluate a 10-year project that produces and sells a new model. The WACC is 5% and the tax rate is 21%. You have to show intermediate steps to earn the credit The project needs a set of machines that costs
800,000 in R&D to develop the new model.
The project will be partially financed with debt, and the interest to be paid every year would be
1,500,000, accounts receivable will increase by
600,000, accruals will increase by
0.5 million. Suppose these changes will reverse at the end of the project.
The net sales from this project will be
100,000 per year. In addition, the firm needs to rent a new office for
500,000. And the accounting department will allocate 20% of this amount to the new project.
Question 1: How much is the initial investment at t-0?