Maple Media is considering a proposal to enter a new line of business. In reviewing the proposal, the company's CFO is considering the following facts:
1. The new business will require the company to purchase additional fixed assets that will cost $600,000 at t=0. For tax and accounting purposes, these costs will be depreciated on a straight-line basis over three years. (Annual depreciation will be $200,000 per year at t=1,2,and 3)
2. At the end of three years, the company will get out of the business and will sell the fixed assets at a salvage value of $100,000.
3. The project will require a $50,000 increase in net operating working capital at t=0, which will be recovered at t=3.
4. The Company's marginal tax rate is 35 percent.
5. The new business is expected to generate $2 million in sales each year (at t=1,2, and 3).
6. The operating costs excluding depreciation are expected to be $1.4 million per year.
7. The projects's cost of capital is 12 percent.
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