Howell Petroleum is considering a new project that complements its existing business.The machine required for the project costs $5.0 million.The marketing department predicts that sales related to the project will be $4.00 million per year for the next four years, after which the market will cease to exist.The machine will be depreciated down to zero over its four-year economic life using the straight-line method.Cost of goods sold are predicted to be 25 percent of sales.Howell also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life.The corporate tax rate is 35 percent.The after-tax WACC for Howell is 13 percent.The machine can be sold for $600,000 at T=4. What is the cash flow at T=0?What is the cash flow at T=1?What is the cash flow at T=4?What is the NPV of the project?

Net present value (NPV) is the present value of cash received in excess of present value of cash…

Answered: Howell Petroleum is considering a new…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 9P

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Howell Petroleum is considering a new project that complements its existing business.

The machine required for the project costs $5.0 million.
The marketing department predicts that sales related to the project will be $4.00 million per year for the next four years, after which the market will cease to exist.
The machine will be depreciated down to zero over its four-year economic life using the straight-line method.
Cost of goods sold are predicted to be 25 percent of sales.
Howell also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life.
The corporate tax rate is 35 percent.
The after-tax WACC for Howell is 13 percent.
The machine can be sold for $600,000 at T=4.

What is the cash flow at T=0?
What is the cash flow at T=1?
What is the cash flow at T=4?
What is the NPV of the project?

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