What is the project expected NPV and IRR

Assignment Help Financial Management

Reference no: EM131603177

Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years:

• The project can be operated at the company's Charleston plant, which is currently vacant.

• The project will require that the company spend $4.9 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on a straight-line basis over 5 years. Thus, the firm's annual depreciation expense is $4,900,000/5 = $980,000. The company plans to use the equipment for all 3 years of the project. At t = 3 (which is the project's last year of operation), the equipment is expected to be sold for $2,300,000 before taxes.

• The project will require an increase in net operating working capital of $700,000 at t = 0. The cost of the working capital will be fully recovered at t = 3 (which is the project's last year of operation).

• Expected high-protein energy smoothie sales are as follows:

Year Sales

1 $2,400,000

2 7,850,000

3 3,500,000

• The project's annual operating costs (excluding depreciation) are expected to be 60% of sales.

• The company's tax rate is 40%.

• The company is extremely profitable; so if any losses are incurred from the high-protein energy smoothie project they can be used to partially offset taxes paid on the company's other projects. (That is, assume that if there are any tax credits related to this project they can be used in the year they occur.)

• The project has a WACC = 10.0%.

What is the project's expected NPV and IRR? Round your answers to 2 decimal places. Do not round your intermediate calculations.

NPV $

IRR %

Reference no: EM131603177

Questions Cloud

Discuss the problem of shortage and surplus of funds : To avoid the problem of shortage and surplus of funds, what is required in Financial management? Name the conceptand explain four points of importance.

What will be optimal upper cash limit : Fischer Inc. would like to maintain its cash account at a minimum level of $36,000. What will be its optimal upper cash limit?

Explain the basic principles of financial accounting : Critically evaluate the role and content of each of the four main financial statements as sources of quantitative data.

What real options are in context of capital budgeting : Explain what “real options” are in the context of capital budgeting.

What is the project expected NPV and IRR : What is the project's expected NPV and IRR?

Formulate the problem as a markov decision process : Each year Ms. Fontanez has the chance to invest in two different no-load mutual funds: the Go-Go Fund or the Go-Slow Mutual Fund.

How much money has accumulated so far : If the fund earns 6% annual interest, how much money has accumulated so far?

Introduction of weight loss smoothie : SSC is considering another project: the introduction of a "weight loss" smoothie. what is the expected NPV of the project today?

Demonstrate that the feasible region is unbounded : If the objective is to maximize Z = -x1 + x2, does the model have an optimal solution? If so, find it. If not, explain why not.

User Account

All Pages