A company is planning to expand one of it’s manufacturing facilities. A piece of property must be purchased at the start of the project at a cost of $1.5 million. The building, which must then be constructed during the first year of the project will cost $3 million. By the end of the first year the company will spend an additional $4 million on equipment and start up cost.

Once the company becomes operational (this will happen before the end of the first year) it will generate revenue in the amount of $3.5 million the first year of operation. This will increase at the annual rate of 5% over the previous years revenue – each year for 9 more years years (total of 10 years of growth) .

After 10 years, the sales revenue will stay constant for another 3 years before operation is phased out. (Total project life is 13 years). 

 

The expected salvage value of the land at the end of the project is $2 million, the building salvage value will be $1.4 million and the equipment salvage $500,000. The annual operating cost and maintenance costs are estimated to be 40% of the revenue each year. (Assume any taxes or other fees are included in the numbers given).

 4 POINTS EACH

A) Draw or construct a cash flow table or diagram showing the yearly dollar values.

B) What is the IRR of the investment? (show all calculations) If the companies Discount Rate is 12%, would this be a good investment?

C) What is the NPV of the project? (show all calculations)

D) If the value of the land and buildings were to become zero (due to pollution) at the end of the project, was this a good investment?

E) Discuss other risks or opportunities of this investment.

 

(Show all the calculations and provide all the details. Submit in word or clear hand written format)

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Status NEW Posted 22 Jun 2017 05:06 AM My Price 8.00

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