New/Expansion projects exercises . . 1. Dewina Food Industries is considering the development of a new ketchup product. The ketchup will be sold in a variety of different colours and will be marketed to young children. In evaluating the proposed project, the company has collected the following information: The company estimates that the project will last for four years. The company will need to purchase new machinery that has an up-front cost of $30 million. At the end of the project, the company expect sell off the machinery for $5 million. The machinery will be depreciated on a 4-year straight-line basis towards zero salvage value. Production on the new ketchup product will take place in a recently vacated facility that the company owns. The project will require a $6 million increase in inventory. The company expects that its accounts payable will rise by $1 million. After t = 0, there will be no changes in net operating working capital, until t = 4 when the project is completed, and the net operating working capital is completely recovered. The company estimates that sales of the new ketchup will be $20 million each of the next four years. The operating costs, excluding depreciation, are expected to be $10 million each year. The company's tax rate is 28 percent. The project's WACC is 10 percent. . . Draw up the project analysis worksheet providing details of each of the three basic elements that must be considered in your evaluation and make recommendation based on the NPV and IRR criteria? 2. VK Langgam Video Production is considering a proposal to enter a new line of business. In reviewing the proposal, the company's CFO is considering the following facts: The new business will require the company to purchase additional fixed assets that will cost $600,000. For tax and accounting purposes, these costs will be depreciated on a straight-line basis over three years towards a zero salvage value. At the end of three years, the company will get out of the business and will sell the fixed assets at an estimated value $50,000. The project will require new working capital investment as follows: Cash $25,000; Inventory $30,000; Accounts Receivables $45,000; Accruals $5,000 and Accounts Payable $45,000 The company's tax rate is 35 percent. The new business is expected to generate $2 million in sales each year. The operating costs excluding depreciation are expected to be 75% of sales. The project's cost of capital is 15 percent. Is the project viable? [Hint: Use the NPV & IRR criteria to make your decision]
