Question
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.
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jeff jeffy answered 2 years agoRelated Solutions
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