In this Assignment you will assess the feasibility of Apex investing in a new project for expansion of its business. The specifications of the project are as follows:
- An initial investment of $30,000,000 today
- Revenues from the project projected to be $22,000,000 at the end of each of the next 5 years
- Cost of Goods Sold (variable costs) is assumed to be 50% of revenue in each of those years
- Equipment purchased for the project will cost $25,000,000 of that initial investment; the rest is for working capital
- Depreciation of the equipment is straight line with a 5 year useful life and a salvage value at the end of the 5th year of $1,000,000
- S,G,&A (fixed overhead) from the project estimated at 10% of revenues throughout
- Apex is in the 40% tax bracket
- Due to taking on more leverage than their current capital structure, Apex cost of capital in this project = 10%
Step One:
- Use the proper TVM tables previously provided to you for discount factors for cash flows
- Set up a spreadsheet showing year-by-year net cash flows from this project
- Calculate the NPV for the project
- Answer the question: Is this project acceptable for Apex?
Step Two:
- Using the IRR financial function in Excel, calculate the IRR for this project
- Answer the question: Is the IRR sufficient for the project to be acceptable for Apex?