In: Finance
Zeynab Inc. is considering a new
5-year expansion project that consists of setting up a new...
Zeynab Inc. is considering a new
5-year expansion project that consists of setting up a new
manufacturing plant. The company bought a land 3 years ago for $1.1
million but did not use it. The company wants to build its new
manufacturing plant on this land; the plant will cost $1.9 million
to build. If the land was sold today, the company would net $1.2
million.
Assume a straight-line
depreciation (of the initial investment in fixed
assets). This project is estimated to generate additional
annual sale quantities of 800,000 for $4.5 per unit. Annual
variable costs are expected to be $2,260,000 and fixed costs would
be $150,000 per year. An upfront investment in inventory
of $25,000 will be reclaimed at the end of the project and there is
no salvage value. Suppose that the required return on the project
is 12 % and the tax rate is 35%.
- What is the proper cash-flow amount to use as the initial
investment in fixed assets when evaluating this
project? Justify your answer by specifying which costs are
incremental and which costs are not incremental. (Hint: You will
find that the investment in fixed assets is equal to $3.1
million).
- The tax rate being 35%, compute the OCF for each year of this
project using the four different approaches and verify that the
answer is the same in each case.
- Assume the company will accept the project if it gets back its
initial investment in fixed assets within 3 years.
Would it accept or reject the project according to this payback
period criterion? Justify your answer.
- Would the company accept or reject the project according to the
discounted payback period criterion? Justify your
answer by providing the detailed computations.
- What’s the NPV for this 5-year project? All computations must
be provided.
- According to NPV, should the corporation accept or reject the
project?
- Is there any conflict between NPV and the payback period
criterion? If yes, which one should be used?
Please answer all the parts. It is one question with different
parts.
Please give it your best attempt. I do not have more information
on it.