Problem:
An expansion will require company to purchase today (t=0) 5 mill. of equipment. the equipment will be depreciated over 4 yrs.
Year1 33%
Year2 45%
Year3 15%
Year4 7%
The expansion will require the company to increase its net operating working capital by 500,000 today (t=0) this net operating working capital will be recovered at the end of 4 yrs. (t=4)The equipment is not expected to have any salvage value at the end of 4yrs. The company's operating costs excluding depreciation are expected to be 60% of annual sales. projected increase:
Year1 3.0 mill
Year2 3.5 mill
Year3 4.5 mill
Year4 4.0 mill
The company's tax rate is 40% and company's other divisions are expected to have positive tax liabilities through the projects life. if the company proceeds with expansion it will need to use a building that the company already owns. The building is fully depreciated however, it is leased out. the company receives 300,000 before tax rental income each year (payable at the year end) if the company proceeds with the expansion the company will no longer receive rental income. the WACC is 10%.
Estimate NPV, IRR, MIRR, and Payback.