Construct the capital budget

Assignment Help Financial Management

Reference no: EM131938644

Capital budgeting.

Felix, an exclusive Estonian wine producer, is considering the purchase of 10,000 French oak barrels at a cost of 900 eur each. The investment into barrels is considered a capital expense and would be depreciated straight line over 5 years. After 4 years, the barrels will be useless for making fine wine, but they expect to be able to sell them for 3 million eur to Gallo. The increase in the quality of its sweet apple line of wines due to the use of the new French oak barrels is expected to increase revenue by 7 million eur (only) in years 3 and 4. The barrels would have no influence on COGS, SG&A, other operating expenses. The additional working capital investment is 10% of the additional sales revenues and is fully recovered when the project ends (in four years). The tax rate is 40% (profits are taxed), and the required return is 12%.

a) Construct the capital budget

b) Evaluate the project on the basis of NPV and MIRR.

Reference no: EM131938644

Questions Cloud

Opportunity to buy commercial property : Michael Masury has an opportunity to buy commercial property. At what price would Michael be indifferent to buying or not buying the? investment?

Considering change in credit standards : The Widget Company is considering a change in it’s credit standards. The company sells currently 15 000 units of Widgets.

Dividend policy and free cash flow to equity : Refer to the previous exercise. Suppose an individual prefers to play the game rather than to accept $200 with certainty.

Five steps in the marketing research process : Describe the five steps in the marketing research process.

Construct the capital budget : Construct the capital budget. Evaluate the project on the basis of NPV and MIRR.

What is your annualized rate of return on this stock : What was your total rate of return on your investment? What is your annualized rate of return on this stock.

What is the probability will experience : What is the probability Kio will experience a loss of $5,000 or greater? what is the most Kio will pay?

What were the proceeds for the issuer and the underwriter : Selkirk Electronics completed an IPO that was sold on a best-effort basis. What were the proceeds for the issuer and the underwriter?

What are the potential savings from the lockbox : Assuming the company can earn 5.5 percent interest per year, what are the potential savings from the lockbox?

User Account

All Pages