Problem:
Kim wants you to review a capital project the company is looking to undertake. The project is a new line of goods the company will produce. Kim has stated that the decision to move forward will be driven by the net present value of the project (it must be positive), and the modified internal rate of return must be at least 13%. Here are the key facts about the project:
- It is expected to produce US$3 million in revenue annually the first year and grow 5% per year thereafter.
- The project will increase operating expenses by US$1.75 million the first year and grow at 3% annually per year thereafter.
- The project cost US$6 million in capital, and the capital will be depreciated on a straight-line basis for 5 years.
- The US$6 million will all be spent in the year prior to the first year in which the company generates revenue.
- The company will evaluate the project over 5 years (not including year 0).
- The company has a 40% tax rate.
- For this project you will use a 12% cost of capital and a 13% reinvestment rate.
Given this information, find the NPV, MIRR, and which year the present value cash flows become positive. Submit your Excel spreadsheet along with slides explaining your work.