Werton Corporation has developed a new processor

4. Werton Corporation has developed a new processor that would be used by many specialty companies. It
   would cost $29 million at Year 0 to buy the equipment necessary to manufacture the facility. The project would
   require net working capital in Year 0 of 5,500,000 and then 5 percent of revenue in each of the operational
   years to follow (Year1 to Year 4). The processor would sell for $83,000 per unit, and Werton believes that
   variable costs would amount to $61,500 per unit. The company’s non-variable costs (incremental cost) would
   be $1.6 million at Year 1. After Year 1, the sales price , variable costs and incremental costs are expected to
   grow at the inflation rate of 2% per year. The processor project would have a life of 4 years. If the project is
   undertaken, it must be continued for the entire 4 years. Also, the project’s returns are expected to be highly
   correlated with returns on the firm’s other assets. The firm believes it could sell 600 units per year. The
   equipment would be depreciated over a 3-year period, using rates (34%, 33%, and 33%). The estimated
   market value (salvage value) of the equipment at the end of the project’s 4-year life is $300,000, but
   environmental close down costs are estimated at $2,100,000 (these cash flows along with WC recovery should
   occur in Year 5). Werton’s federal-plus-state tax rate is 30%. Its cost of capital is 10% for average-risk projects.
   Should Werton invest in the project (i.e., calculate the NPV).

Sample Solution

The post Werton Corporation has developed a new processor appeared first on homework handlers.