2) Boston Times is considering introducing a new monthly magazine. The company anticipates that it will cost $20 million in initial costs to create the infrastructure needed to produce the magazine, and that it can depreciate this cost straight line over the next 10 years to a salvage value of $ 5 million. The magazine expects to price the magazine at $ 2 an issue. They expect advertising expense of $1.50 per issue sold and printing and production cost of $ 1 per issue. The magazineâ€™s content will be produced by the existing staff but will have to increase the salary of existing employees which will amount to $ 20 million. The initial working capital needed in year 1 is 10% of revenues and then working capital increases by 10% each year. The cost of capital is 9% and the marginal tax rate is 40%.
a) If Boston magazine expects to sell 200,000 copies a month each month for the next 10 years, estimate the annual after-tax cash flow from investment.
b) Estimate the NPV of the investment. Should Boston Times accept the project?