International Buckeyes is building a factory that can make 1 million buckeyes a year for five years, after which the market will cease to exist. The factory costs $6 million, paid immediately. In Year 1, each buckeye will sell for $3.15 in nominal terms. The price will increase 4 percent each year in real terms. Variable costs will be $0.75 per buckeye in nominal terms in Year 1 and will rise by 2 percent each subsequent year in real terms. International Buckeyes will fully depreciate the factory over five years using the straight line method of depreciation. The firm will be able to sell the factory for $638,140.78 in nominal terms at the end of Year 5. The nominal discount rate for cash flows is 20 percent. The rate of inflation is 3 percent per year. Cash flows, except for the initial investment, occur at the end of each year. The corporate tax rate is 34 percent. What is the NPV of the project?
Calculate Net Present Value (NPV)
Calculate Weighted Average Cost of Capital (WACC)
What competitive advantages flow from a low WACC
Calculate Intenal Rate of Return (IRR)
Calculate the IRR for the International Buckeyes case