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  3. you are the investment analyst at crs corporation the company...

Question: you are the investment analyst at crs corporation the company...

Question details

You are the investment analyst at CRS Corporation. The company has significant presence in mining and retail industry.  The company proposes to establish a new factory to manufacture washing machines.  The following details about the proposal are available:

 

  • Life of the project is 4 years
  • Investment in factory site is $2.2 million and the site can be sold for $2.2 million at the end of 4 years.
  • Investment in working capital is $350,000 at the commencement of the project.  This investment will be recovered at the end of the project life.
  • The company needs to invest $2.0 million in machines.  The machines will be depreciated on straight line basis to zero book value at the end of 4 years. Salvage value of machines will be zero at the project’s life.
  • Annual cash sales: $3.5 million
  • Annual cash operating costs: $2.9 million
  • The company pays corporate tax at 30%.
  • Dividend imputation does not apply to the company.
  • The company’s CEO has advised that it uses the company’s cost of capital of 13% to evaluate all its projects.

Calculate the NPV of the project.  Will you recommend the investment?

 

 

 

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 Part B: Do you believe that it is appropriate that CRS Corporation should use the company’s cost of capital to evaluate the proposed project? Explain your answer.

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