a manufacturer of drones has recruited you as a financial consultant. The market for drones is growing quickly. The company bought some land three years ago for $2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $2.3 million on an after tax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the drone market, at a cost of $125,000. An excerpt of the marketing report is as follows: The drone industry will have a rapid expansion in the next four years. With the brand name recognition that Alpha brings to bear, we feel that the company will be able to sell 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of Alpha, we feel that a premium price of $750 can be charged for each drone. Because drones appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. Alpha believes that fixed costs for the project will be $415,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule (see Table 6.4 of your textbook, BMA). At the end of the project, the equipment can be scrapped for $350,000. Net working capital of $125,000 will be required immediately. Alpha has a 38 percent tax rate, and the required return on the project is 13 percent.
What is the NPV of the project?
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Applied Corporate Finance, 4th ed. Damodaran, Aswath Wiley. 2015ISBN-13: 978-1118808931
Principles of Corporate Finance, 10th ed.Brealey, R. A., Myers, S. C.,