Franco Salt Company

State Rock Salt Contract Analysis

Amount of Rock Salt per Year $32,000$ Tons

Revenue per Ton $$150$

Cost of Equipment $$1,520,000$

Life $5$

MACRS Class $5$

Fixed Cost $$350,000$

Var Cost$/$Ton $$115$

Total Var Cost $$3,680,000$

Actual Salvage $$109,000$

Change in NWC $$90,000$

Required Return $10\%$

Tax Rate $36\%$

MACRS schedule $5$ year class

Year Depreciation percent

$10\mathrm{.}2$

$20\mathrm{.}32$

$30\mathrm{.}192$

$40\mathrm{.}1152$

$50\mathrm{.}1152$

$60\mathrm{.}0576$

Franco's Salt Company is evaluating a possible Rock Salt Contract. The contract runs $5$ years with $32,000$ tons to be delivered per year. The revenue per ton is $$150$ and the variable cost per ton is $$115.$ The machinery will cost $$1,520,000$ and is to be depreciated using MACRS $5$ year class. FC per year are $$350,000.$ After $5$ years the equipment can be sold for $$109,000$ in salvage value. There is an $$90,000$ investment needed in net working capital that will be recovered in year $5.$ The required return is $10\%$ and the company tax rate is $36\%.$ Using excel,

$1.$ Calculate the Annual Cash Flows for the project.

$2.$ Calculate the NPV$.$

$3.$ Calculate the payback and discounted payback

$4.$ Calculate the IRR and MIRR.

$5.$ Should the company pursue the contract?