CSC is an oven manufacturer. It is evaluating a project to produce new ovens. The project has the following features:
a. Initial investment in plant and equipment today is $2 million.
b. First-year sales are forecasted at $1million and costs at $300,000. Both are expected to stay constant for the duration of the project.
The project will last three years.
c. Working capital each year is forecasted at 20% of following-year sales.
d. The project will use a facility of CSC. Had CSC not do the project, the facility would have been rented for
$10,000 a year (cash flow after tax).
e. For tax purposes, the plant is expected to depreciate straight line over 5 years with a salvage value of zero.
However, at year 3, when the project ends, the firm expects to sell the machines for $1m (before taxes).
f. Taxes are 35% on firms' profits and capital gains. The discount rate is 10%.
g. CSC expects that the introduction of the new oven will result in migration of customers from CSC's current oven line to the new one.
The after tax cash loss from reduction of sales of the current oven line is expected to be $10,000 a year.
Should CSC invest in the project?
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