Business Finance
Applying Risk Methodologies

Question 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 budget.
  • Please submit 6–12 slides Powerpoint Presentation with 150–200 speaker notes. Please include references.

Final Answer

Here is the answer. Thanks

Appraisal of Coffee Packaging Project

Apix Company

Sufficiency of Financial Information for
Decision Making
 There was sufficient information to determine the incremental
free cash flows from the project.
 No further financial information is required.

Determinants of the Decision
 Net Present Value (NPV), and
 Internal Rate of Return (IRR)

Determination of the NPV and IRR of
the Coffee Packaging Project
 Net Present Value (NPV): $(996642.68)
 Internal Rate of Return (IRR): 9.08%

Project Acceptability and
Recommendation
 Overall Feasibility and Acceptability: The project is not
f...

FinAccGuru (1382)
UT Austin

Anonymous
Return customer, been using sp for a good two years now.

Anonymous
Thanks as always for the good work!

Anonymous
Excellent job

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