Ceval Paper and Pulp is considering building a new plant to make specialized paper products (for ink-jet printers). The plant will cost $1,500 thousand to build, and the investment will be depreciated over 4 years, down to a salvage value of zero, using the following schedule: 50% depreciation in year 1, 25% in year 2, 12.5% in years 3 and 4. The plant is expected to generate revenues of $1200 thousand next year, growing at 5% for a year for the following three years. The fixed expenses of operating the plant are expected to be $100 thousand each year and the variable costs are 40% of revenues. The plant will be worth $250 thousand at the end of the fourth year when they sell it. The tax rate for the firm is 40%. The firm has to maintain inventory at 10% of next year’s revenues, with the investments occurring at the beginning of each year (years 0, 1, 2, and 3), and the entire investment in working capital can be salvaged at the end of the project’s life. The company’s tax situation is such that it can make use of all applicable tax shields. The opportunity cost of capital is 15%.
a) What is the NPV of the project?
b) What is the annual after-tax profit of the project?
c) What is the annual pre-tax profit of the project?
d) What is the IRR for this project?