Problem:
ABC is considering purchasing the existing business of a competitor who produces Model X-Ray Superconductors. The life of this product is estimated to be 20-years, after which the assets will be sold. The details of the transaction are as follow:
Company's assets (e.g., equipment and machinery) 2,000,000
Land 3,000,000
Building 5,000,000
11,000,000
Total purchase price:
ABC Company has negotiated a loan with a local bank to borrow 10,000,000, on 5% simple interest rate, six-year note payable. The principle and the interest will be paid in six equal installments.
The yearly production capacity of the machines are 100,000 units for the first 10 years and 350,000 for the second 10-year. Each unit can be sold for the price of 300. The average cost of production is 200 per unit. In addition to the above cost, the company must also incur the following expenses on a yearly basis:
Administrative salary 100,000
Rent 200,000
Repair and maintenance 50,000
Training 100,000
Insurance 150,000
Deprecation on building 250,000
Depreciation of equipment and machinery 100,000
Additional information:
Requirements to carry a spare parts inventory 500,000
Refundable of unused spare parts 200,000
Estimated value of the business at he end of 20 years 23,000,000
Required:
1. Using a net present value method, analyze the attractiveness of this investment project. ABC expected rate of return is 10%.
2. Report should have an introduction section describing what is the objective of the assignment, introduce the subject of the discussion, and give a brief overview of what would be presented (discussed) in the report.
3. The report should have a summary. The purpose of the summary section is to present the highlights of the topics discussed in the report.