2024 – Burress Beverages is considering a project where they would open a new

Burress Beverages is considering a project where they would open a new facility in Seattle, Washington. The company’s CFO has assembled the following information regarding the proposed project:

 
· It would cost $500,000 today (at t = 0) to construct the new facility. The cost of the facility will be depreciated on a straight-line basis over five years.
· If the company opens the facility, it will need to increase its inventory by $100,000 at t = 0. $70,000 of this inventory will be financed with accounts payable.
· The CFO has estimated that the project will generate the following amount of revenue over the next three years:

 Year 1 Revenue = $1.0 million
 Year 2 Revenue = $1.2 million
 Year 3 Revenue = $1.5 million

· Operating costs excluding depreciation equal 70% of revenue.
· The company plans to abandon the facility after three years. At t = 3, the project’s estimated salvage value will be $200,000. At t = 3, the company will also recover the net operating working capital investment that it made at t = 0.
· The project’s cost of capital is 14%.
· The company’s tax rate is 40%.

What is the project’s net present value (NPV)?