Reference no: EM133143957

Question - The Salinas Corporation is considering whether or not to build a plant for manufacturing furniture. The current date is 12/31/X0. The initial outlay today will be $10 million. The plant will start production on 1/1/X1. It will produce furniture for 5 years. At the end of that time the market value of the plant is expected to be $5 million. Each year the corporation estimates it will be able to produce and sell 1,000 sofas. The sofas are priced at $5,000 each and this price is expected to increase by 3% throughout the time the plant is producing. The raw materials are expected to cost a total of $500,000 and increase by 2% each year that furniture is made. The total cost of labor is estimated to be $600,000 on 12/31/X1. It is expected to increase by 3% in the future. The land the plant is to be built on could be rented out for $350,000 each year with the rent being paid at the beginning of each year (i.e., the first rental payment is 12/31/X0). The corporation's opportunity cost of capital for this type of project is 12%. The relevant tax rate for the corporation is 35%. Depreciation for tax purposes is straight line during the five years the plant is in production. Please assume that the asset is fully depreciated. The firm has profitable ongoing operations. Assume all cash flows occur at the end of each year except where otherwise stated. What is the NPV and IRR of the plant?