Reference no: EM132600305

Apex is considering coffee packaging as an additional diversification to its product line. Here's information regarding the coffee packaging project:

1. Initial investment outlay of $40 million, consisting of $35 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year
2. Project and equipment life: 5 years
3. Sales: $27 million per year for five years
4. Assume gross margin of 50% (exclusive of depreciation)
5. Depreciation: Straight-line for tax purposes
6. Selling, general, and administrative expenses: 10% of sales
7. Tax rate: 35%

Assume a WACC of 10%.

Question 1: Should the coffee packaging project be accepted? Why or why not? Compute the project's IRR and NPV.

In addition, answer the following questions:

Question 2: Do you believe that there was sufficient financial information to make a solid decision on what to do?

Question 3: Was there further financial information that you required that was not provided to you?

Question 4: What financial figure do you believe was the determinant to your decision and why?

Question 5: How would you be able to apply this particular financial information to other situations?

Question 6: Discuss risk methodologies used in capital budgeting.