FINC615 NPV-IRR_IP_4-1.xls
“Do we have
everything we need on sales and costs?” you ask. ”It must be time to compute
the net present value (NPV) and internal rate of return (IRR) of the Apix
expansion project.” “We have the data from James and Luke regarding projected
sales and costs, respectively, for the food packaging project,” says Mary. “It
is feasible to project that we will receive a tax break from this implementation.
I have information from our audit firm that indicates that future depreciation
methods for taxes will be straight-line; however, the corporate rates will be
reduced to 35% as we assumed in our weighted average cost of capital (WACC)
calculation.” “That sounds good,” you say.
“Right,"
says Mary. "You can use a WACC of 10% for the computation of the NPV and
comparison for IRR."
“I’ve got
the information I need from Luke and James,” you say. "Does this look
right to you? Here’s what they gave me,” you say, as you hand a sheet of paper
to Mary.
“Let’s look
at this now while we’re together,” she says.
The
information you hand to Mary shows the following:
Initial
investment outlay of $30 million, consisting of $25 million for equipment and
$5 million for net working capital (NWC) (plastic substrate and ink inventory);
NWC recoverable in terminal year
Project and equipment
life: 5 years
Sales: $25
million per year for five years
Assume gross
margin of 60% (exclusive of depreciation)
Depreciation:
Straight-line for tax purposes
Selling,
general, and administrative expenses: 10% of sales
Tax rate:
35%
You continue
your conversation.
“It looks good,” says Mary. “Use this
information from Luke and James to compute the cash flows for the project.” “No
problem,” you say.
“Then,
compute NPV and IRR of the project using the Excel spreadsheet I sent earlier
today,” says Mary. “Use the IRR financial function for the computation of IRR.”
“Okay,” you say. "I’ll submit my Excel
file showing the computation of cash flows, NPV, and IRR by the end of week so
you can look at it over the weekend.”
“Thanks,”
says Mary.
Complete the
above worksheet for this assignment.
SPREADSHEET
FIN 615
NPV and IRR calculations
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Cost of Capital
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10.00%
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Time/yr
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0
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1
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2
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3
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4
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5
|
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Cash flow Input here
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|
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Discounted CF
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0
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0
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0
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0
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0
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0
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NPV
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0
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=cf1/((1+n)^1)
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=cf2/((1+n)^2)
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=cf3/((1+n)^3)
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=cf4/((1+n)^4)
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=cf5/((1+n)^5)
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PV factor
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0.909090909
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0.826446281
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0.751314801
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0.683013455
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0.620921323
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IRR
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#NUM!
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File name: FINC615 NPV-IRR IP 4-1.xls File type: .xls PRICE: $15
