Colorado Tech University Applied Managerial Finance Unit 5 IP Presentation

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zppe283

Economics

Colorado Technical University

Description

Apix is considering coffee packaging as an additional diversification to its product line. Here’s information regarding the coffee packaging project:

  • Initial investment outlay of $40 million, consisting of $35 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: $27 million per year for five years
  • Assume gross margin of 50% (exclusive of depreciation)
  • Depreciation: Straight-line for tax purposes
  • Selling, general, and administrative expenses: 10% of sales
  • Tax rate: 35%

Assume a WACC of 10%.

Should the coffee packaging project be accepted? Why or why not? Compute the project’s IRR and NPV.

In addition, answer the following questions:

  • Do you believe that there was sufficient financial information to make a solid decision on what to do?
  • Was there further financial information that you required that was not provided to you?
  • What financial figure do you believe was the determinant to your decision and why?
  • How would you be able to apply this particular financial information to other situations?
  • Discuss risk methodologies used in capital budgeting.

6 - 12 slides with 150 - 200 words in notes section

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Explanation & Answer

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Applied Managerial Finance Unit 5 IP
INSTITUTIONAL AFFILIATION
DATE

Should the coffee packaging project be accepted?

 The project can only be accepted if the
IRR

is higher
Higher gross margin, and
High net income.
 The NPV is negative hence the project cannot be

accepted.

NPV/IRR calculation

Sufficien...


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