Over lunch, you and Mary meet to discuss next steps with the expansion project.
we have everything we need on sales and costs?” you ask. ”It must be
time to compute the net present value (NPV) and internal rate of return
(IRR) of the Apix expansion project.”
“We have the data from James
and Luke regarding projected sales and costs, respectively, for the food
packaging project,” says Mary. “It 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)
“That sounds good,” you say.
“Right,” says Mary. “You can use a WACC of 10% for the computation of the NPV and comparison for IRR.”
got the information I need from Luke and James,” you say. “Does this
look right to you? Here’s what they gave me,” you say, as you hand a
sheet of paper to Mary.“Let’s look at this now while we’re together,”
The information you hand to Mary shows the following:
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.
“It looks good,” says Mary. “Use this information from Luke and James to compute the cash flows for the project.”
“No problem,” you say.
compute NPV and IRR of the project using the Excel spreadsheet I sent
earlier today,” says Mary. “Use the IRR financial function for the
computation of IRR.”
“Okay,” you say. “I’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.”
“Thanks,” says Mary.
Complete the attached worksheet for this assignment.