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Project Evaluation - Cash Flows, IFF, NPV & IRR

Project Evaluation Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a seven-year project. The company bought some land three years ago for $8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $10.2 million. In five years the land will probably be worth the same amount. The company wants to build its new manufacturing plant on this land; the plant will cost $30 million to build. DEI's tax rate is 35 percent. The project requires $900,000 in initial net working capital investment to get operational. RDS's cost of capital is 13%
The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 7), the plant can be scrapped for $5 million.

The company will incur $400,000 in annual fixed costs. The plan is to manufacture 17,000 RDSs per year and sell them at $10,000 per machine; the variable production costs are $9,000 per RDS.
a. What are the project's annual operating cash flows?

b. Draw a time line depicting all projects cash flows. Indicate cash outflows with (brackets).

c. What is the project's IRR and NPV?

IRR: ____________ NPV: ___________

d. What level of sales (in units) must RDS to achieve an IRR of 15%?

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Solution Summary

The expert examines project evaluations for cash flows, IFF, NPV and IRR.