Reference no: EM133164053
Question - Using relevant data provided about the Chemical Fertilizer Project below, create a cash flow table, using the Excel formulas and calculate the NPV, IRR, PVI and discounted payback period.
A company is planning to invest in a farm-grade chemical fertilizer project that requires equipment with a purchase price of $92,000. The installation cost for the equipment would be $17,000. The transportation cost of $7,000 for the fertilizer-producing equipment would be paid by the supplier.
Starting production with this equipment requires an additional investment of $29,000 in inventory and $14,000 in accounts receivable. Whereas, there would be additional accounts payable of $24,000.
The equipment will have an economic life of seven years and would be depreciated at 11 percent straight line for the tax purpose. The salvage value of the equipment is estimated to be $17,000 at the end of the project life.
In order to analyse the effectiveness of the fertilizer to boost production, the management has spent $13,000 on clinical tests. The tests revealed that the fertilizer would have some detrimental effects on the soil for multiple uses on any farmland. It requires further research for reducing the side effects of this fertilizer. Despite the adverse outcomes of the tests, the management has decided to go for the production. Expected sales in the first year would be $95,000. Sales are expected to grow at 17% in each year until the 7th year. Costs have been estimated to be 42 percent of sales revenue. In addition, there would be an annual fixed overhead cost of $7,974.
This new project will increase the annual interest expense from $8,000 to $9,800. If the project is started, annual sales of the company's insecticide products will increase by $25,000 in the first year and that increased sales will further grow by 7 percent in each year until the 7th year. The cost of sale for the insecticide products is 80 percent. Whereas, due to the start of the project, the company's regular net earnings of $8,000 from the same production facility would be discontinued.
The cost of capital is estimated to be either 11.00 percent or 17.00 percent. The management has targeted a discounted payback period of four years. Applicable corporate tax rate would be 32 percent.
What would be your decision about this project at 11.00 and 17.00 percent costs of capital?
What would be your comment in recommending this project considering qualitative factors?