Problem 6 (19 marks) XrayGlasses Inc (XGI) is in the process of deciding whether to invest in a new production facility. The new facility will enable it to produce and sell x-ray machines to airports. The management of XGI has determined the following estimates for the new project: - Cost of new plant and equipment today is $4,450,000; installation costs are an additional $50,000 - Life of project 10 years; expected salvage of plant \& equipment is $250,000 - An environmental assessment of the building site that has already been paid is $5,000 - The CCA rate for the equipment is 25%. Assume the Accelerated Investment Incentive applies. - Currently work in progress inventory is $64,000. This is expected to increase by $2,000 immediately and to remain at this higher level for the life of the project. This inventory will be sold at the end of the project - Currently accounts receivable are $15,000. This is expected to increase by $3,000 immediately and to remain at this higher level for the life of the project, at which time the accounts will be paid in full. - Currently accounts payable are $25,000. This is expected to increase by $2,000 immediately and to remain at this higher level for the life of the project, at which time the accounts will be paid in full. - XGI expects to sell 200 machines each year for the next 10 years. The expected selling price per machine is $10,000; variable costs are expected to be $5000 per machine. - Annual fixed costs for the firm are currently $900,000 per year and will rise to $930,000 per year during the project. - XGI expects to pay $14,000 per year in interest and $36,000 per year in dividends during this project. - XGI has a 40% tax rate and a required return of 10% for this project. a) Calculate the NPV of this project. Should the project be accepted or rejected? (18 marks) b) What can you say about the IRR of the project? No calculations required. (1 mark) Problem 6 (19 marks) XrayGlasses Inc (XGI) is in the process of deciding whether to invest in a new production facility. The new facility will enable it to produce and sell x-ray machines to airports. The management of XGI has determined the following estimates for the new project: - Cost of new plant and equipment today is $4,450,000; installation costs are an additional $50,000 - Life of project 10 years; expected salvage of plant \& equipment is $250,000 - An environmental assessment of the building site that has already been paid is $5,000 - The CCA rate for the equipment is 25%. Assume the Accelerated Investment Incentive applies. - Currently work in progress inventory is $64,000. This is expected to increase by $2,000 immediately and to remain at this higher level for the life of the project. This inventory will be sold at the end of the project - Currently accounts receivable are $15,000. This is expected to increase by $3,000 immediately and to remain at this higher level for the life of the project, at which time the accounts will be paid in full. - Currently accounts payable are $25,000. This is expected to increase by $2,000 immediately and to remain at this higher level for the life of the project, at which time the accounts will be paid in full. - XGI expects to sell 200 machines each year for the next 10 years. The expected selling price per machine is $10,000; variable costs are expected to be $5000 per machine. - Annual fixed costs for the firm are currently $900,000 per year and will rise to $930,000 per year during the project. - XGI expects to pay $14,000 per year in interest and $36,000 per year in dividends during this project. - XGI has a 40% tax rate and a required return of 10% for this project. a) Calculate the NPV of this project. Should the project be accepted or rejected? (18 marks) b) What can you say about the IRR of the project? No calculations required. (1 mark)
