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    Cash Flow Scenarios

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    Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas.

    Over lunch, you and Mary meet to discuss next steps with the expansion project.

    "Do we have everything we need on sales and costs?" you ask. "It must be time to compute the net present value (NPV) and internal rate of return (IRR) of the Apex expansion project."

    "We have the data from James and Luke regarding projected sales and costs, respectively, for the food packaging project," says Mary. "It is feasible to project that we will receive a tax break from this implementation. I have information from our audit firm, which indicates that future depreciation methods for taxes will be straight-line; however, the corporate rates will be reduced to 35% as we assumed in our weighted average cost of capital (WACC) calculation."

    "That sounds good," you say.

    "Right," says Mary. "You can use the WACC you computed last week and apply this work to the computation of the NPV and comparison for IRR."

    "I've got the information I need from Luke and James," you say. "Does this look right to you? Here's what they gave me," you say, as you hand a sheet of paper to Mary.

    "Let's look at this now while we're together," she says.

    The information you hand to Mary shows the following:

    Initial investment outlay of $30 million, consisting of $25 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year
    Project and equipment life: 5 years
    Sales increase: $25 million annually
    Assume gross margin of 60% (exclusive of depreciation)
    Depreciation: Straight-line for tax purposes
    Selling, general, and administrative expenses: 10% of sales
    Tax rate: 35%
    You continue your conversation.

    "It looks good," says Mary. "Use this information from Luke and James to compute the cash flows for the project."

    "No problem," you say.

    "Then, compute NPV and IRR of the project using the Excel spreadsheet I sent earlier today," says Mary. "Use the IRR financial function for the computation of IRR."

    "Okay," you say. "I'll submit my Excel file showing the computation of cash flows, NPV, and IRR by the end of week so you can look at it over the weekend."

    "Thanks," says Mary.

    To recap: Complete the above worksheet for this assignment.

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    Solution Summary

    Solution helps in suggesting NPV and IRR of the project using the Excel spreadsheet