Susan's Salt Company is evaluating a possible Rock Salt Contract. The contract runs 5 years with 23,000 tons to be delivered per year. The revenue per ton is $135 and the variable cost per ton is $105. The machinery will cost $1,490,000 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 $105,000 in salvage value. There is an $85,000 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%.

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 to contract?

Salida Salt Company
State Rock Salt Contract Analysis			MACRS schedule 5 year class
Amount of Rock Salt per Year	23,000 Tons		Year	Depreciation percent
Revenue per Ton	$ 135		1	0.2
Cost of Equipment	$ 1,490,000		2	0.32
Life	5		3	0.192
MACRS Class	5		4	0.1152
Fixed Cost	$ 350,000		5	0.1152
Var Cost/Ton	$ 105		6	0.0576
Total Var Cost	$ 2,415,000
Actual Salvage	$ 105,000
Change in NWC	$ 85,000
Required Return	10%
Tax Rate	36%

Net Present Value

Payback Period

Discounted Payback Period

IRR

MIRR

Part B:

The project appears to be acceptable since it has a positive NPV.

Part C:

Using the Goal Seek tool, the lowest acceptable bid price is $128.80 per ton. Anything less would result in a negative NPV.

Part D:

The project has a positive expected NPV of $211,592, with a standard deviation of $531,082. The probability of a negative NPV is about 34.50%. Given the positive expected NPV and the low probability of a negative NPV, the project is acceptable.