Central cheese is a leading producer of cheese in the United STATES. Richard Jackson founded the company in 1950 after spending several years in Italy during and after World War II. He was convinced the dairy industry in Wisconsin could produce cheeses whose quality would equal or surpass those for which Italy was famous. Originally, Jackson sold the cheese to wholesalers who would package it under their own brand names. Sales grew rapidly. Several years later, Jackson joined with several other independent producers to form central cheese. Recently sales, while continuing to grow modestly, began to show signs of losing market share to competitors who produced more expensive, premium cheeses. Sales asked marketing to do a study about the possibility of producing a premium cheese which could meet this new competition. Their initial findings were positive. Sales and marketing then joined with production to analyze the feasibility of central cheese producing this new product. After several months, they felt central should go ahead with the project. They would set up production in an unused section of their main plant. New machinery with an estimated cost of $2,100,000 would be purchased. Shipping would cost $150,000 and there would be an additional charge of the same amount for installation. Inventories would increase by $75,000 and receivables would increase by $125,000. the machinery was estimated to have a useful life of four years. Depreciation would be on the modified accelerated cost recovery system (MACRS) with allowances of 33%, 45%, 15% and 7% for the four years of its useful life. The machinery is expected to be sold after four years for $150,000. The company had been thinking about leasing the unused portion of the factory that is scheduled to be used for the new project. They had received several interesting offers, the most favorable of which was for $20,000 per year. Annual sales of the new product were estimated to be 150,000 cases at $35 per case. Costs, excluding depreciation, would be 80% of sales. It was felt that existing sales would be cannibalized by $20,000 per year. The company’s weighted average cost of capital was 12%. Its marginal tax rate was 40%. you have been asked to present the project to the board of directors and, as part of your report, you must develop answers to the following questions.

Calculate the project’s NPV, IRR, and payback period. Should the project be accepted?

Answer rating: 100% (QA)

IRR Internal rate of returns This is a financial measure used in project management and budgeting in order to efficiently determine the profits that would be generated from a given capital investment ... View the full answer