CHEMX, INC. - CAPITAL PROJECT ANALYSIS $ in millions Cost of machine $ 2,600,000 Residual value end of year 10 3.0% Expected COGS Savings 10.0% Annual incremental working capital $ 2,000 ChemX, Inc. is a manufacturer of chemical products with locations in the United States. Its manufacturing plant in Harrisburg, PA is considering the purchase of a new mixing machine. The cost of goods sold will be $6,850,000 in year 1, and will increase by $200,000 each year. The cost of the machine is $2,600,000 and it is expected to result in cost savings of 10.0% of that location's cost of goods sold over the life of the mixing machine which is 8 years. Tax depreciation 5 year MACRS based on cost of the machine Year 1 20% Year 2 32% Year 3 19% Year 4 12% Year 5 12% Year 6 5% O Over the 8 years an annual investment in working capital will be required of $2,000 (needs to be input at the beginning of year). At the end of its life it can be sold for 3% of the original cost. Five year MACRS depreciation will be used for tax purposes, which has the depreciation rate of 20%, 32%, 19%, 12%, 12% and 5% for the first five years. The company's marginal tax rate is 25%. Tax Rate Required Rate of Return 25% 10% Prepare an analysis to determine if this project will generate an attractive level of economic benefits. Specifically determine the net present value and internal rate of return, payback period, discounted payback period, profitability index of the project. PERIOD 0 1 2 3 4 5 6 7 8 Cost of goods sold - Harrisburg, PA plant Cost savings (=revenue) Less: Depreciation BEBIT Less: Taxes Net Income Add: Depreciation Less: Change in net working capital 3 Less: Capital expenditure Cash Flow 2,000 2,600,000 5 Cumulative Cash Flow Payback Period Payback-----> 9 CF in year 4 not needed Percentage not needed Percentage needed plus first 3 years 1 Present value of Cash Flow 5 Cumulative Discounted Cash Flow Discounte Payback-----> NPV IRR PAYBACK PERIOD Discounted Payback Period Profitability Index CF in year 6 not needed Percentage not needed Percentage needed plus first 5 years CHEMX, INC. - CAPITAL PROJECT ANALYSIS $ in millions Cost of machine $ 2,600,000 Residual value end of year 10 3.0% Expected COGS Savings 10.0% Annual incremental working capital $ 2,000 ChemX, Inc. is a manufacturer of chemical products with locations in the United States. Its manufacturing plant in Harrisburg, PA is considering the purchase of a new mixing machine. The cost of goods sold will be $6,850,000 in year 1, and will increase by $200,000 each year. The cost of the machine is $2,600,000 and it is expected to result in cost savings of 10.0% of that location's cost of goods sold over the life of the mixing machine which is 8 years. Tax depreciation 5 year MACRS based on cost of the machine Year 1 20% Year 2 32% Year 3 19% Year 4 12% Year 5 12% Year 6 5% O Over the 8 years an annual investment in working capital will be required of $2,000 (needs to be input at the beginning of year). At the end of its life it can be sold for 3% of the original cost. Five year MACRS depreciation will be used for tax purposes, which has the depreciation rate of 20%, 32%, 19%, 12%, 12% and 5% for the first five years. The company's marginal tax rate is 25%. Tax Rate Required Rate of Return 25% 10% Prepare an analysis to determine if this project will generate an attractive level of economic benefits. Specifically determine the net present value and internal rate of return, payback period, discounted payback period, profitability index of the project. PERIOD 0 1 2 3 4 5 6 7 8 Cost of goods sold - Harrisburg, PA plant Cost savings (=revenue) Less: Depreciation BEBIT Less: Taxes Net Income Add: Depreciation Less: Change in net working capital 3 Less: Capital expenditure Cash Flow 2,000 2,600,000 5 Cumulative Cash Flow Payback Period Payback-----> 9 CF in year 4 not needed Percentage not needed Percentage needed plus first 3 years 1 Present value of Cash Flow 5 Cumulative Discounted Cash Flow Discounte Payback-----> NPV IRR PAYBACK PERIOD Discounted Payback Period Profitability Index CF in year 6 not needed Percentage not needed Percentage needed plus first 5 years