Valles Global Industries (VGI) is considering selling a product to SohnCo. The c
ID: 1172987 • Letter: V
Question
Valles Global Industries (VGI) is considering selling a product to SohnCo. The contract sells parts for revenue of $32 million a year for 15 years. Their initial investment is $150 million and the equipment has no salvage at 15 years. They estimate production costs at $7,530,000 per year. They use straight-line depreciation and pay tax at 48%. If VGI
Valles Global Industries (VGI) is considering selling a product to SohnCo. The contract sells parts for revenue of $32 million a year for 15 years. Their initial investment is $150 million and the equipment has no salvage at 15 years. They estimate production costs at $7,530,000 per year. They use straight-line depreciation and pay tax at 48%. If VGI's After-Tax MARR is 10%, should they do this project? Why?Explanation / Answer
Hi,
Please find the answer as follows:
Initial Investment = -150000000
Annual Cash Inflow = (32000000 - 7530000 - 150000000/15)*(1-.48) + 150000000/15 = 17524400
NPV = -150000000 + 17524400/(1+.10)^1 + 17524400/(1+.10)^2 + 17524400/(1+.10)^3 + 17524400/(1+.10)^4 + 17524400/(1+.10)^5 + 17524400/(1+.10)^6 + 17524400/(1+.10)^7 + 17524400/(1+.10)^8 + 17524400/(1+.10)^9 + 17524400/(1+.10)^10 + 17524400/(1+.10)^11 + 17524400/(1+.10)^12 + 17524400/(1+.10)^13 + 17524400/(1+.10)^14 + 17524400/(1+.10)^15 = -16708020.299 or -16708020.30
Since the NPV is negative, the project should not be accepted.
Thanks.
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