Colorado Technical University Wk 5 Net Present Value and Internal Rate of Return PPT

User Generated

nfbar0511

Business Finance

Colorado Technical University

Description

Demonstrate how you solved for the NPV and IRR of the project, you must clearly state whether the project should be accepted or rejected, AND you must answer and/or address each of the following items in the assignment guidelines:

  • 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?
  • How would you be able to apply this particular financial information to other situations?
  • Discuss risk methodologies used in capital budgeting.

Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas.

Apex 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?
  • How would you be able to apply this particular financial information to other situations?
  • Discuss risk methodologies used in capital budgeting.

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Explanation & Answer

Attached. Please let me know if you have any questions or need revisions.

Year one to four Cashflow
Depreciation per year

=
=

35000000/5
$7,000,000.00

Yearly revenue
yearly gross margin

=
=
=

$27,000,000.00
50% * $27,000,000
$13,500,000.00

selling and admin exp

=
=
=

10% * 27,000,000
$2,700,000.00
$3,800,000.00

Taxes

=
=

35% * 27000,000
$1,330,000.00

Net income after tax

=

$2,470,000.00

Net cashflow from operating activities

=

$9,470,000.00

=
=

9,470,000+$5,000,000

EBIT

Year 5 cashflow
net cashflow from operating activities + net working capital

$14,470,000.00

000+$5,000,000

FIN 615
NPV and IRR calculations

Cos...


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