Type: Individual Project
Unit: Investment Valuation and Decision Making
Due Date: Wed,10/13/21
Grading Type: Numeric
Points Possible: 100
Points Earned: Points Earnednot available
Deliverable Length: Completed worksheet
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Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas.
Over lunch, you and Mary meet to discuss next steps with the expansion project.
â€œDo we have everything we need on sales and costs?â€ you ask. â€It must be time to compute the net present value (NPV) and internal rate of return (IRR) of the Apix expansion project.â€
â€œWe have the data from James and Luke regarding projected sales and costs, respectively, for the food packaging project,â€ says Mary. â€œIt is feasible to project that we will receive a tax break from this implementation. I have information from our audit firm that indicates that future depreciation methods for taxes will be straight-line; however, the corporate rates will be reduced to 35% as we assumed in our weighted average cost of capital (WACC) calculation.â€
â€œThat sounds good,â€ you say.
â€œRight,” says Mary. “You can use a WACC of 10% for the computation of the NPV and comparison for IRR.”
â€œIâ€™ve got the information I need from Luke and James,â€ you say. “Does this look right to you? Hereâ€™s what they gave me,â€ you say, as you hand a sheet of paper to Mary.
â€œLetâ€™s look at this now while weâ€™re together,â€ she says.
The information you hand to Mary shows the following:
- Initial investment outlay of $30 million, consisting of $25 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year
- Project and equipment life: 5 years
- Sales: $25 million per year for five years
- Assume gross margin of 60% (exclusive of depreciation)
- Depreciation: Straight-line for tax purposes
- Selling, general, and administrative expenses: 10% of sales
- Tax rate: 35%
You continue your conversation.
â€œIt looks good,â€ says Mary. â€œUse this information from Luke and James to compute the cash flows for the project.â€
â€œNo problem,â€ you say.
â€œThen, compute NPV and IRR of the project using the Excel spreadsheet I sent earlier today,â€ says Mary. â€œUse the IRR financial function for the computation of IRR.â€
â€œOkay,â€ you say. “Iâ€™ll submit my Excel file showing the computation of cash flows, NPV, and IRR by the end of week so you can look at it over the weekend.â€
â€œThanks,â€ says Mary.
Complete the above worksheet for this assignment.
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