workflow in its cross-dock warehouse in Singapore. This project is forecast to p

Question

workflow in its cross-dock warehouse in Singapore. This project is forecast to produce incremental Operating Cash Flow of $154,440 each year. Initially, this 4-year project will require a $50,000 increase in net working capital. The company has spent $45,000 on a technical study in order to assess this equipment earlier this year. The equipment required for the project will cost $410,000 and will be depreciated to zero straight-line over five years. The equipment will be sold at the end of the project for $90,000. Management has further determined that the project will require a risk adjustment of 3.5% to WACC given currency and other local practices that are different than its US. business. (10) E-O Logistics management is considering investing in a new fleet of forklifts to improve Lay out the project cash flows and calculate NPV and IRR (use template below). Would you recommend the project? Why? (12 points) Recommendation: Why? IRR = NPV = Question (10) Template: Year 2 4 OCF NWC NCS

Explanation / Answer

Calculation of NPV Year 0 1 2 3 4 NPV OCF        1,54,440        1,54,440        1,54,440        1,54,440 NWC            -50,000            50,000 Cost of Equipment         -4,10,000 Salavge Value            90,000 Total Flow         -4,60,000        1,54,440        1,54,440        1,54,440        2,94,440 Disc. Fact=1/(1+.135)^n            1.00000          0.88106          0.77626          0.68393          0.60258 Dis. Cash Flow         -4,60,000        1,36,070        1,19,886        1,05,626        1,77,424      79,007 Assumed no tax as tax rate is not given Technical study cost is an historical cost so can be ignored Assumed WACC=10% so Disc factor=10%+3.5%=13.5% Calculation of IRR Let discount it another factor of 21% Year 0 1 2 3 4 NPV OCF        1,54,440        1,54,440        1,54,440        1,54,440 NWC            -50,000            50,000 Cost of Equipment         -4,10,000 Salavge Value            90,000 Total Flow         -4,60,000        1,54,440        1,54,440        1,54,440        2,94,440 Disc. Fact=1/(1+.21)^n            1.00000          0.82645          0.68301          0.56447          0.46651 Dis. Cash Flow         -4,60,000        1,27,636        1,05,485            87,177        1,37,358       -2,343 IRR=13.5+(79007/(79007+2343))*(21-13.5) 20.78% Since NPV>0 & IRR>13.5% So project should be accepted

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