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Rare Agri - Products Ltd . is considering a new project with a projected life of seven ( 7 ) years. The project falls under
Rare AgriProducts Ltd is considering a new project with a projected
life of seven years. The project falls under the governments
subsidy program for encouraging local agricultural products and is
eligible for a onetime rebate of on any initial equipment
installed for the project. The initial equipment IE will cost
$ An additional equipment AE costing
$ will be needed at the end of year At the end of seven
years, the original equipment, IE will have no resale value but
the supplementary equipment, AE can be sold for $ A working
capital of $ will be needed.
The project is forecast to generate sales of agriproducts over the
seven years as follows:
Year units
Year units
Years units
Years units
A sale price of $ per unit for the first two years is expected and
then decline to $ per unit thereafter as the newness of the product
loses some sheen. The variable expenses will amount to of sales
revenue. Fixed cash operating expenses will amount to $ per
year.
The company falls in the tax category for ordinary income and
tax category for capital gain.
The initial equipment is depreciated as per the year MACRS system
and the additional equipment is depreciated on a straightline basis.
In the event of a negative taxable income, the tax is computed as
usual and is reported as a negative number, indicating a reduction in
loss after tax.
The initial financing of the project will be carried out as follows:
equity and debt. The company paid $ per share in the form
of dividend this year, which is likely to increase at a rate of
per year for the near future. The current price of the companys stock
is $ per share. The bank loan is likely to be arranged at an
interest rate of pa
You are required to:
Compute the appropriate rate for discounting the cash flows of
the project
Compute the initial investment required
Compute the earnings before taxes for years through
Compute the earnings after taxes for years through
Compute the OCF for years through
Compute the Terminal cash flow
Compute the FCF for years through
Compute the NPV and IRR
Should the project be accepted?
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