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A2milk company currently buys milk cartons from an outside supplier at $0.25 per carton to produce its fresh milk. It requires 5,000,000 cartons per
A2milk company currently buys milk cartons from an outside supplier at $0.25 per carton to produce its fresh milk. It requires 5,000,000 cartons per year. A2milk is considering making the cartons itself instead of buying them. Direct in-house production cost is estimated to be 0.15 per carton. To produce the cartons, it would cost $1,500,000 to purchase and install the equipment today. The life of the equipment will be 5 years, after which it is expected to be sold for 5% of the original cost. The equipment will also need to be maintained in the second year of production for a cost of $20,000. Note: for calculation questions in the following parts, round the answers to 2 decimal places. (a) The project will last for years. The net cash flows by year are Year zero $ Year one $ Year two $ Year four $ and Year five is $ Year three $ (b) If the cost of capital of A2milk is 15%, the NPV of this project is $ The project should be because (c) The cost of capital would make A2milk indifferent between accepting or rejecting this project is % (d) If the A2Milk's credit rating upgrades unexpectedly, holding other factors constant, the cost of capital will most likely to = because a higher credit rating means a will the shareholders. This change to WACC will lead to default risk. Hence the creditor will require a return, and so = the value of NPV and the value of IRR.
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