A large food-processing company is consider a new plant to produce refined sugar from sugar cane. The initial capital cost is $100 million. Annual sales revenue is expected to be $30 million. The annual cost of sugar cane is expected to be $1 million and operating costs are expected to be $1 million. The minimum DCFROR is 12%, and the effective tax rate is 40%. Write-off undepreciated assets and working capital at the end of the project evaluation life.
a) Use a 7-year project evaluation life to determine the NPV and DCFROR for the project.
b) In order to maintain consistency and reliability, the plant requires an inventory of raw materials and spare parts and equipment. Using a 7-year project evaluation life, determine the NPV and DCFROR, if the plant requires $3 million in working capital.
c) Comment on the impact of including the working capital. Is the project still economically attractive? Must we include working capital? Can the working capital be minimized?