Show calculations in Excel. Your company is thinking about installing a new manufacturing line that will cost $2,740,000. It will be installed in a building that was purchased in 1998 for $375,000. If the line isn't installed, the building would remain empty. The proposed manufacturing line will be depreciated on a straight-line basis during its 8-year life, to a net book value of $0. If your company decides to build the manufacturing line, it will require immediate increases in Inventory of $256,000, Accounts Receivable of $312,000, and Accounts Payable of $216,500. To partially finance this manufacturing line project, your company will issue Long-Term Debt of $875,000.
The new manufacturing line is expected to create products that will generate first year Sales of $3,132,000, Costs of Goods Sold (COGS) expense of $857,000, and Selling, General and Administrative (SG&A) expense of $283,300. Thereafter, Sales are expected to grow 7% per year, and both COGS and SG&A are expected to remain at a constant percentage of Sales. At the end of the projects five-year life, production will cease, and the manufacturing line will be sold for an estimated $800,000. At that time, all Current Asset and Current Liability accounts will return to their pre-project levels.
Capitals tax rate is 21%. The firm has 10,000,000 shares of common stock outstanding. The firm requires a 14% rate of return on capital projects.
Prepare a discounted cash flow analysis to determine whether your employer should implement this capital project. Your analysis should provide answers to each of the following questions.
What is the projects initial investment requirement (the cash flow at the end of year zero)?
What are the future operating cash flows (the operating cash flows at the ends of years 1 through 5)?
What is the total terminal cash flow (the non-operating cash flow at the end of year 5)?
What is the NPV?
What is the IRR?
Should your company implement the project? Why or why not? Answer this question in two different ways, first, using the results of your NPV calculation, and second, using the results of your IRR calculation.
How much does the project earn? Answer this question in two different ways, first, by using your NPV calculation and second using IRR.
If your company puts this project into effect, what will be the expected stock price change (that is, the capital gain or loss per share)?
