# Burress Beverages is considering a project where they would open a new facility Question

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)?

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