Kdua Products is considering a new project that requires an investment of $24 million in machinery. This is expected to produce sales of $65 million per year for 3 years. Operating expenses are 70% of sales. The machinery will be fully depreciated to a zero book value over 3 years using straight-line depreciation. There is no salvage value. There is an initial investment of $3 million in net working capital. At the end of year 3, the firm gets $2 million back in net working capital. The tax rate is 40%. You estimate that Whoopee will have a residual value of $12 million at the end of the 3 years. The unlevered return on assets is 11%.
a) Calculate the base-case NPV (net present value).
b) Kdua plans to use $8,000,000 in debt at 6% to fund the project. Use Adjusted Present Value (APV) to find the value of the project. The debt has a three-year life.