Applied Managerial Finance (4)

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Must be grammatically correct and plagiarism free. Include in text citations as well as reference page as appropriate. 

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

Over lunch, you and Mary meet to discuss next steps with the expansion project.

“Do we have everything we need on sales and costs?” you ask. ”It must be time to compute the net present value (NPV) and internal rate of return (IRR) of the Apix expansion project.”

“We have the data from James and Luke regarding projected sales and costs, respectively, for the food packaging project,” says Mary. “It 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.”

“That sounds good,” you say.

“Right,” says Mary. “You can use a WACC of 10% for the computation of the NPV and comparison for IRR.”

“I’ve got the information I need from Luke and James,” you say. “Does this look right to you? Here’s what they gave me,” you say, as you hand a sheet of paper to Mary.

“Let’s look at this now while we’re together,” she says.

The information you hand to Mary shows the following:

  • 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%

You continue your conversation.

“It looks good,” says Mary. “Use this information from Luke and James to compute the cash flows for the project.”

“No problem,” you say.

“Then, compute NPV and IRR of the project using the Attached Excel spreadsheet I sent earlier today,” says Mary. “Use the IRR financial function for the computation of IRR.”

“Okay,” you say. “I’ll submit my Excel file showing the computation of cash flows, NPV, and IRR by the end of week so you can look at it over the weekend.”

“Thanks,” says Mary.


Additional Info:

NWC Recapture is in the fifth year.

NWC is given in task list.

The discount rate is given. It is WRONG. Replace it with a 10% discount rate.

A hint: the numbers will look the same for all five years, except for the total cash flow. Year 5 will be different due to NWC recovery.

Sales are given (This is also called Revenue)

Gross margin is given

Calculate: COGS (You must find the equation that gives you COGS from gross margin and sales (revenue))

Subtract from Sales


SGA expense

Subtract these from Sales

This gives Gross Profit.

Calculate yearly depreciation, straight line for tax purposes, look this up.

Subtract this from Gross Profit.

This gives EBT, Earnigs Before Taxes

Calculate Taxes on basis of EBT, tax rate is given.

Subtract this from EBT

This gives Net Income

Add Depreciation back in to Net Income

Add NWC recovery to Net Income in the 5th year.

This gives a Cashflow for each year.

Put this into your spreadsheet. The NPV and IRR should calculate automatically. If it does not you have made a mistake.

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