Question
AllCo makes robotic arms that are used in the medical equipment industry. They are considering a project to make their products for a four-year period
AllCo makes robotic arms that are used in the medical equipment industry. They are considering a project to make their products for a four-year period under a US$ contract in Dubai, a country in which they have never done business. AllCo has spent $45,000 on a feasibility study in order to assess this project last year. The project is expected to generate annual sales of $555,000. Variable cost will be 22% of sales; annual fixed costs will be $187,000. Initially, this 4-year project will require a $50,000 increase in net working capital. The equipment required for the project will cost $630,000 and will be depreciated to zero straight-line over five years. This equipment will be sold at the end of the project to their joint venture partner for $175,000. The relevant tax rate is 32%. The companys WACC is 17% however, for this project management will add another 3% in order to capture the foreign risk in their required rate of return. Lay out the project cash flows and calculate NPV and IRR (we are ignoring payback here). Based on these results would you recommend the project? Why?
NPV- IRR= Recommendation: Year 0 2 4 OCF NWC NCSStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started