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ABC Company wants to produce 1.35 million units per year of a product. Investment cost is...

ABC Company wants to produce 1.35 million units per year of a product. Investment cost is 27.5 million dollars and the project falls under the 7 year MACRS class life with a salvage value of of 2.75 million at the end of 6 years. The average price for each unit is $90. Annual expected sales are shown below.

Year. 2020. 2021. 2022. 2023. 2024. 2025
Volume. 600. . 750 1000. 1200. 1200. 1200

Material cost for each unit is $25 with 30% of the material imported from Canada and 40% imported from Mexico. Labor is $20 per unit with variable cost at $22 per unit. Fixed cost of operations is $10.5 million annually. ABC maintains 1 month of raw materials, of WIP and of finished products to balance demand.Tax rate is 30% and state rate is 10% and MARR is 20%.

1. What is the NPV of the investment?
2. If they could borrow 15 million of the 27.5 million needed at 15%, how would this chage the NPV?
3. If inflation is 2% and pricing is locked in for 6 year period, how does the NPV change? Assume they borrowed 15 million of the 27.5 million needed at 15%.
4. Calculate sesitive analysis on +/- 15% change in volume, selling price, and material cost from part 3 and graph the answer.

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Expert Solution

Year 0 2020 2021 2022 2023 2024 2025
1.Annual expected sales 600000 750000 1000000 1200000 1200000 1200000
2.Sales $ at $ 90/unit 54000000 67500000 90000000 108000000 108000000 108000000
3.Less: Costs:
4.Material cost (Row 2*$ 25) 15000000 18750000 25000000 30000000 30000000 30000000
5.Labor (Row 2*20) 12000000 15000000 20000000 24000000 24000000 24000000
6.Variable cost(Row 28*$ 22) 13200000 16500000 22000000 26400000 26400000 26400000
7.Fixed cost 10500000 10500000 10500000 10500000 10500000 10500000
8.MACRS Depn. 3929750 6734750 4809750 3434750 2455750 2453000
9.EBT -629750 15250 7690250 13665250 14644250 14647000
10.Less: Tax at (30%+10%)=40% -251900 6100 3076100 5466100 5857700 5858800
11.EAT -377850 9150 4614150 8199150 8786550 8788200
12.Add Back: Depn. 3929750 6734750 4809750 3434750 2455750 2453000
13.Operating cash flow 3551900 6743900 9423900 11633900 11242300 11241200
CAPEX & NWC cash flows:
14.Initial Invetsment -27500000
15.After-tax salvage 3122900
NWC cash flows:
16.Raw materials(next yr. Row 4/12) 1250000 1562500 2083333 2500000 2500000 2500000 0
17.WIP-next(4+5)/12 2250000 2812500 3750000 4500000 4500000 4500000 0
18.Fin.gds. Next (4+5+6+7)/12 4225000 5062500 6458333 7575000 7575000 7575000 0
19.Total NWC reqd.(16+17+18) 7725000 9437500 12291667 14575000 14575000 14575000 0
20.Beg. W/c 0 7725000 9437500 12291667 14575000 14575000 14575000
21.End. w/c 7725000 9437500 12291667 14575000 14575000 14575000 0
22.Change in w/c(20-21) -7725000 -1712500 -2854167 -2283333 0 0 14575000
23.Total CAPEX & NWC cash flows(14+15+22) -35225000 -1712500 -2854167 -2283333 0 0 17697900
24. Net annual cash flows(13+23) -35225000 1839400 3889733 7140567 11633900 11242300 28939100
25. PV F at 20%(1/1.2^Yr.n) 1 0.83333 0.69444 0.57870 0.48225 0.40188 0.33490
26.PV at 20%(24*25) -35225000 1532833.3 2701204 4132272 5610484.2 4518028.2 9691646
27. NPV(Sum of Row 26) -7038532
Yr. MACRS rate %*27500000 Acc. Depn. Carrying value at end of 6 yrs.(add Yr. 7+Yr. 8 depn.) 3682250
1 14.29 3929750 Salvage 2750000
2 24.49 6734750 Loss on salvage 932250
3 17.49 4809750 Tax saved on loss on salvage (40%) 372900
4 12.49 3434750 AT cash flow on salvage(2750000+372900) 3122900
5 8.93 2455750
6 8.92 2453000 23817750
7 8.93 2455750
8 4.46 1226500
100 27500000
2. WACC
Wt.of debt 15/27.5)= 54.55%
Wt. of balance (27.5-15)/27.5= 45.45%
WACC=
(54.55%*15%*(1-40%))+(45.45%*20%)=
14%
2. NPV at 14% -Debt-15 mln.
24. Net annual cash flows(13+23) -35225000 1839400 3889733 7140567 11633900 11242300 28939100
25. PV F at 14%(1/1.14^Yr.n) 1 0.87719 0.76947 0.67497 0.59208 0.51937 0.45559
26.PV at 14%(24*25) -35225000 1613509 2993023 4819679 6888203 5838898 13184265
27. NPV(Sum of Row 26) 112577
3…Inflation 2% for expenses only--selling price-locked-in for 6 yrs.
Year 0 2020 2021 2022 2023 2024 2025
1.Annual expected sales 600000 750000 1000000 1200000 1200000 1200000
2.Sales $ at $ 90/unit 54000000 67500000 90000000 108000000 108000000 1.08E+08
3.Less: Costs:
4.a.Material cost/unit 25 25.5 26.01 26.53 27.06 27.60
4.b.Total Material cost (1*4a) 15000000 19125000 26010000 31836240 32472965 33122424
5a..Labor cost/unit 20 20.4 20.81 21.22 21.65 22.08
5b.Total labor cost(1*5a) 12000000 15300000 20808000 25468992 25978372 26497939
6a.Variable cost/unit 22 22.44 22.89 23.35 23.81 24.29
6b.Total Variable cost(1*6a) 13200000 16830000 22888800 28015891 28576209 29147733
7.Fixed cost 10500000 10710000 10924200 11142684 11365538 11592848
8.MACRS Depn. 3929750 6734750 4809750 3434750 2455750 2453000
9.EBT(2-4b-5b-6b-7-8) -629750 -1199750 4559250 8101442.8 7151166.7 5186055
10.Less: Tax at (30%+10%)=40% -251900 -479900 1823700 3240577.1 2860466.7 2074422
11.EAT -377850 -719850 2735550 4860865.7 4290700 3111633
12.Add Back: Depn. 3929750 6734750 4809750 3434750 2455750 2453000
13.Operating cash flow 3551900 6014900 7545300 8295615.7 6746450 5564633
CAPEX & NWC cash flows:
14.Initiai Invetsment -27500000
15.After-tax salvage 3122900
NWC cash flows:
16.Raw materials(next yr. Row 4b/12) 1250000 1593750 2167500 2653020 2706080.4 2760202 0
17.WIP(4b+5b)/12 2250000 1593752 2167502 2653022 2706082.2 2760203.8 0
18.Fin.gds.(4b+5b+6b+7)/12 4225000 5163750 6719250 8038651 8199423.6 8363412.1 0
19.Total NWC reqd.(16+17+18) 7725000 8351252 11054252 13344692 13611586 13883818 0
20.Beg. W/c 0 7725000 8351252 11054252 13344692 13611586 13883818
21.End. w/c 7725000 8351252 11054252 13344692 13611586 13883818 0
22.Change in w/c(20-21) -7725000 -626252 -2703000 -2290441 -266893.85 -272231.7 13883818
23.Total CAPEX & NWC cash flows(14+15+22) -35225000 -626252 -2703000 -2290441 -266893.85 -272231.7 17006718
24. Net annual cash flows(13+23) -35225000 2925648 3311900 5254859 8028721.8 6474218.3 22571351
25. PV F at 14%(1/1.14^Yr.n) 1 0.87719 0.76947 0.67497 0.59208 0.51937 0.45559
26.PV at 14%(24*25) -35225000 2566358 2548399 3546880 4753648 3362506 10283204
27. NPV(Sum of Row 26) -8164004

jeff jeffy answered 2 years ago
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