Question
I need help with calculations to find the NPV, IRR, and profitability index. Fridgolux Major Appliances North America designs and manufactures large home appliances such
I need help with calculations to find the NPV, IRR, and profitability index.
Fridgolux Major Appliances North America designs and manufactures large home appliances such as ovens, washers, and refrigerators. While Fridgolux is a global multinational, the North American division sells only in the US and Canada. The Fridgolux marketing department has determined an increasing trend towards home brewing and an overall increase in beer consumption. As such, they believe that there exists a market opportunity to introduce a specialized beer refrigerator. To help determine the viability of the project, Fridgolux paid $45,000 to a firm specializing in the analysis of the beer and wine industry.
The Fridgolux BeerFridge is expected to sell for $525. Initial sales are expected to be 250,000 units per year with sales increasing by 35,000 units per year over the life of the project. Additionally, Fridgolux has contracted with a large retailer to produce fridges under the BeerMore brand. The contract guarantees sales of 200,000 units per year for $400 each. Fixed costs are expected to be $39,750,000 per year while variable costs are $360 per unit. The project requires an investment in Net Working Capital of 10% of sales that will be built up in the year prior to sales and will be reclaimed when the project winds down.
The facility will be built on land in Greenville, Michigan that Fridgolux purchased some 14 years ago for $3.7 million. The land is now valued at $5.23 million, and its value is expected to increase at the same rate for the foreseeable future. The land will require $180,000 in landscaping before a production facility can be constructed. The facility and all equipment are expected to cost $52 million and will be depreciated to zero on a straight-line basis over 7 years. Fridgolux anticipates ending the project after 5 years. In year 6, Fridgolux will have to spend $4 million after taxes to dispose of the refrigerant charging system in an environmentally responsible manner. At this point, the facilities and equipment can be sold for 30% of their acquisition cost.
Assume that Fridgolux faces a 21% tax rate and has a required return of 9%.
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