Firm XYZ is considering a project to built a new facility to install a new produ
ID: 2550809 • Letter: F
Question
Firm XYZ is considering a project to built a new facility to install a new production line. The firm requires a minimum return of 10% in this project, due to the risks involved. The firm is a 34% tax bracket. Sales, revenues and costs details are given in the table below:
Cost of new plant and equipment
$9,700,000
Shipping and installations costs
$300,000
Unit Sales forecasted
Year 1 50,000
Year 2 100,000
Year 3 100,000
Year 4 70,000
Year 5 50,000
Sales price per unit sold
$145
Variable costs per unit produced
$80
Annual fixed costs
$500,000
Net Working Capital requirements
An initial $100,000 will be needed to start production. After that, net working capital requirements until year 5 will be equal to 5% of the total sales for the year. No NWC will be recuperated at the end of year 5
Depreciation
Using the straight-line method, the depreciation expense is $2,000,000 per year during the five years of the project life.
Tasks:
Estimate the CCFA for the next 5 years of operation
Using the NPV and IRR decision methods, decide if the firm should take the project.
Cost of new plant and equipment
$9,700,000
Shipping and installations costs
$300,000
Unit Sales forecasted
Year 1 50,000
Year 2 100,000
Year 3 100,000
Year 4 70,000
Year 5 50,000
Sales price per unit sold
$145
Variable costs per unit produced
$80
Annual fixed costs
$500,000
Net Working Capital requirements
An initial $100,000 will be needed to start production. After that, net working capital requirements until year 5 will be equal to 5% of the total sales for the year. No NWC will be recuperated at the end of year 5
Depreciation
Using the straight-line method, the depreciation expense is $2,000,000 per year during the five years of the project life.
Explanation / Answer
Year Investment Sales units Sales in $ VC in $ FC Depreciation Net income Tax @ 34% Income after tax Cash inflow Workin capital Add/ Release in WC Net Cashflow 0 -10,000,000 -100,000 -10,100,000 1 50000 7250000 4000000 500,000 2,000,000 750,000 255000 495,000 2,495,000 362500 -262500 2,232,500 2 100000 14500000 8000000 500,000 2,000,000 4,000,000 1360000 2,640,000 4,640,000 725000 -362500 4,277,500 3 100000 14500000 8000000 500,000 2,000,000 4,000,000 1360000 2,640,000 4,640,000 725000 0 4,640,000 4 70000 10150000 5600000 500,000 2,000,000 2,050,000 697000 1,353,000 3,353,000 507500 217500 3,570,500 5 50000 7250000 4000000 500,000 2,000,000 750,000 255000 495,000 2,495,000 362500 145000 2,640,000 Note: Working capital i.e. 5% of Sales has been inrtroodcued or released at the end of each year NPV Year cashflows PVf @ 10% Present value 0 -10,100,000 1 -10100000 1 2,232,500 0.909091 2029545 2 4,277,500 0.826446 3535124 3 4,640,000 0.751315 3486101 4 3,570,500 0.683013 2438700 5 2,640,000 0.620921 1639232 NPV 3028701 Req 2: IRR Npv at 25% Year cashflows PVf @ 25% Present value 0 -10,100,000 1 -10100000 1 2,232,500 0.8 1786000 2 4,277,500 0.64 2737600 3 4,640,000 0.512 2375680 4 3,570,500 0.4096 1462477 5 2,640,000 0.32768 865075.2 NPV -873168 IRR = Lower rate + (NPV at lower rate / Difference in NPV )* Difference in rates 10% + (3028,701 / 3901869) * 15% = 21.64% NPV at 10% $3,028,701 IRR 21.64%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.