Kim wants you to review a capital project the company is looking to undertake. The project is a new line of goods the company will produce. Kim has stated that the decision to move forward will be driven by the net present value of the project (it must be positive), and the modified internal rate of return must be at least 13%. Here are the key facts about the project:
- It is expected to produce US$3 million in revenue annually the first year and grow 5% per year thereafter.
- The project will increase operating expenses by US$1.75 million the first year and grow at 3% annually per year thereafter.
- The project cost US$6 million in capital, and the capital will be depreciated on a straight-line basis for 5 years.
- The US$6 million will all be spent in the year prior to the first year in which the company generates revenue.
- The company will evaluate the project over 5 years (not including year 0).
- The company has a 40% tax rate.
- For this project you will use a 12% cost of capital and a 13% reinvestment rate.© BrainMass Inc. brainmass.com June 3, 2020, 7:12 pm ad1c9bdddf
For your reference purpose:
The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment.
The procedures that provide useful information are the Net present Value (NPV), the Internal Rate of Return (IRR), and the MIRR. These procedures will help rank the projects from the greatest ...
This provides the steps to calculate the NPV, MIRR, and which year the present value cash flow becomes positive