The following is data regarding projected sales and costs, respectively, for the project. It is feasible to project that we will receive a tax break from this implementation. 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.
You can use a WACC of 10% for the computation of the NPV and comparison for IRR.
• 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
• Project and equipment life: 5 years
• Sales: $25 million per year for five years
• Assume gross margin of 60% (exclusive of depreciation)
• Depreciation: Straight-line for tax purposes
• Selling, general, and administrative expenses: 10% of sales
• Tax rate: 35%
Use this information to compute the
1. Cash flows for the project.
2. Net Present Value (NPV)
3. Internal Rate of Return (IRR) of the project using the Excel spreadsheet. Use the IRR financial function for the computation of IRR.
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