A group of investors wants to assess the profitability of opening a factory in early 2022 that will be dedicated to wholesale frozen chicken prey. According to the projections made, the company will operate for 12 years.
During the first year of operation (2022), production will reach only 50% of installed capacity.
It expects to sell 65,000 kilos of frozen chicken in the first year and from the second year of operations, the company expects an increase in production and therefore sales of 8% per year until reaching 100% of capacity.
The price of a kilo of frozen chicken is estimated at $ 8,000 for the first year and rises with inflation for the other years.
Inflation for the first 3 years is expected to be 3.0%, then decrease 0.1% annually for 4 years and then remain constant until the end of the project.
The investments required in millions of pesos for the start of the project (year 0) are:
Acquisition of machinery and equipment 200
Office Furniture 16
Working capital 110 and recovers in year 6
At the beginning of year 3 he buys another team for 150 million.
The cost of the raw material is 35% of the sales value.
The other costs, expenses and the sale price rise with inflation and for the first year are the following (in millions of pesos):
Operators 145
Maintenance and spare parts 15
Administrative expenses 95
Leasing of facilities 60
Utilities 22
Selling and Advertising Expenses 10
Advertising expenses also go up with inflation, but from year 5 onwards they will drop 10% compared to the previous year.
The salvage value of machinery and equipment is 10% and is recovered at the end of the 12 years that is the duration of the project.
Machinery and equipment are depreciated in 5 years in a linear way and office furniture in 6 years by the sum of digits method and their salvage value is zero (0).
The equipment acquired in year 3 also depreciates in 5 years on a straight-line basis and has a salvage in year 12 of 10% of the acquisition value.
The income tax rate is the one currently in force, that is, 30% for all years
The company will have a rent advance (withholding at source) of 2.5% of 20% of sales.
The Minimum Attractive Rate for the investor is 20% per year
At the beginning of the project, two credits are obtained, one of $ 100 million with an interest rate of 10% per year, to be paid in equal installments for six (6) years and a loan of 100 million pesos which is obtained in dollars at a rate of 8% annually, to be paid in installments with an increasing gradient of 5% for six (6) years.
The value of the dollar at the time of the credit is 3,800 pesos per dollar and it is expected to rise 2% for two years and then fall 2% for four years (term to cancel the loan).
1. Work out the cash flow of the project
2. Work out the cash flow of the credits
3. Work out the investor's cash flow
4. Find the project's VPN using the WACC
5. Find the after-tax IRR of the project and the IRR of the investor.
Explanatory notes:
Remember that salvage pays taxes, but at the occasional win rate (10%).
To calculate the WACC, take into account the real interest of the loan in dollars and must bring as equity to point 0, the investment of year 3 (the 150 million of the equipment purchased that year) with the IRR of the investor's cash flow.