<\/p>\n
Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas. <\/p>\n
Over lunch, you and Mary meet to discuss next steps with the expansion project. <\/p>\n
\u201cDo we have everything we need on sales and costs?\u201d you ask. \u201dIt must be time to compute the net present value (NPV) and internal rate of return (IRR) of the Apix expansion project.\u201d
\u201cWe have the data from James and Luke regarding projected sales and costs, respectively, for the food packaging project,\u201d says Mary. \u201cIt 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) calculation.\u201d
\u201cThat sounds good,\u201d you say.
\u201cRight,” says Mary. “You can use a WACC of 10% for the computation of the NPV and comparison for IRR.”
\u201cI\u2019ve got the information I need from Luke and James,\u201d you say. “Does this look right to you? Here\u2019s what they gave me,\u201d you say, as you hand a sheet of paper to Mary. \u201cLet\u2019s look at this now while we\u2019re together,\u201d she says.<\/p><\/blockquote>\nThe information you hand to Mary shows the following:<\/p>\n
\n
- Initial 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 <\/li>\n
- Project and equipment life: 5 years <\/li>\n
- Sales: $25 million per year for five years <\/li>\n
- Assume gross margin of 60% (exclusive of depreciation) <\/li>\n
- Depreciation: Straight-line for tax purposes <\/li>\n
- Selling, general, and administrative expenses: 10% of sales <\/li>\n
- Tax rate: 35% <\/li>\n<\/ul>\n
You continue your conversation.<\/p>\n