CASH FLOW ESTIMATION New/expansion Project:

Advance Ideas Mechanics plans to build a new plant to manufacture a new line of Microchips. The project requires an initial outlay of USD4 million to construct the new plant in Year 0. The company needs an additional cash outlay of USD1 million to buy machinery at the end of the first year. The plot of land on which the new plant is to be built could otherwise be rented out for USD500,000 per annum before taxes. The company must forego this annual rental income if they proceed with the construction of the new plant.

The production of the new line of Microchips is expected for only three years beginning in the second year. Advance Ideas Mechanics will close the operations of the plant and sell it at the end of fourth year. The forecasted sales are as follows:

	Year 2	Year 3	Year 4
Sales	500,000 units	400,000 units	100,000 units

Each unit of the new Microchip can be sold for USD30 in the second year and the price is expected to increase by 6% per year in each of the subsequent years. The raw materials required for each unit of the new Microchip are expected to cost USD15 on average for equipment produced in the second year and this is expected to increase at a rate of 3% per year in each of the subsequent years. The labour cost per unit for producing a unit of the Microchip is expected to be USD5 in Year 2 and this is expected to increase at a rate of 5% per year in the subsequent two years.

Advertising cost for the new Microchip is estimated to cost USD500,000 in the first year, USD220,000 in Year 2 and USD50,000 in Year 3. The company uses straight line method of depreciation and annual depreciation will start from the end of Year 1. The anticipated after-tax proceed from the sale of the plant (together with the machinery) at the end of Year 4 is RM2 million.

The company has a cost of capital of 12% for projects as risky as the new plant. The companys tax rate is 24%.

Calculate the net present value (NPV) and Modified Internal Rate of Return (MIRR) of investing in the new plant and decide whether it is a viable project.

Please show workings for my better understanding.

Thankyou :D