Axylotl Industries, Inc. is a relatively small company in Eastern Washington that produces avionic parts and equipment for both the commercial airline industry and the military. The company recently won several contracts in 2020 for production starting in 2021. As a result, they need to expand their production and testing capabilities. As CFO of Axylotl Industries, you are responsible for conducting the analysis of the capital project needed to allow the company to fulfill the contracts.Detailed discussions with the sales and marketing personnel indicate that sales in the first year would be $61 million and grow at 3.5% per year through the ten year life of the project. Accounting has indicated that the sales, general and administrative costs would be fixed at $8 million for the life of the project. Accounting also estimates working capital needs at 22% of revenue. Engineering and Manufacturing have indicated that the cost of goods will be 62% of sales.

The equipment is estimated to cost $55 million with an additional $40 million for installation. It has a ten year economic life and falls within the 7 year MACRS class for depreciation purposes. 

Axyolotl Industries estimates that the equipment can be sold for $3 million at the end of the project life. The new production facilities will also require a new building at a cost of $19 million. The building has a 39 year life and is required to use straight line depreciation. The market value of the building at the end of the project is estimated to be $9 million.Axylotl Industries’ marginal tax rate is 35% and the project will initially use 14% as the cost of capital although this is not the company’s present weighted cost of capital. The WACC will be refined using the book value weighted average cost of capital you will calculate in Part B. Now that the contract is signed, determine whether this project will be profitable for the company. The board of directors requires all project analyses to include the net present value, internal rate of return, payback and profitability index.

Your written report for Part A should include a discussion of the project in general as well as how the cash flows are determined and measures of project desirability are determined. The report should be relatively brief but include the calculation of Net Present Value (NPV), Internal Rate of Return (IRR) and the Payback Period.

Market Risk Premium0.09.T-Bill Rate0.03T-Bond Rate0.039Tax Rate0.35Beta1.25Current Long-Term Debt Yield0.058Preliminary Discount Rate0.14

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Page 8 Axylotl Industries, Inc. Balance Sheet as of December 31, 2020 Thousands of $ Assets Current Assets: Cash 37.000 Accounts Receivable 96.000 Inventory Total Current Assets 131.200 264,200 Long-Term Assets: 186,000 Plant, Property and Equipment Other Assets Total Long-Term Assets Total Assets 21.700 207.700 471.900 Liabilities and Equit Current Liabilities: 63.000 Accounts Payable Commercial Paper Accrued Expenses and Taxes Long Term Debt Maturing within 1 Year Capital Lease Obligations Due within 1 Year Total Current Liabilities 0. 17.000 80.000 Long Term Liabilities: Long-Term Debt Capital Lease Obligations Deferred Income Taxes 167.500 Total Long-Term Liabilities 167.500 Chp Page 8 Axylotl Industries, Inc. Balance Sheet as of December 31, 2020 Thousands of $ Assets Current Assets: Cash 37.000 Accounts Receivable 96.000 Inventory Total Current Assets 131.200 264,200 Long-Term Assets: 186,000 Plant, Property and Equipment Other Assets Total Long-Term Assets Total Assets 21.700 207.700 471.900 Liabilities and Equit Current Liabilities: 63.000 Accounts Payable Commercial Paper Accrued Expenses and Taxes Long Term Debt Maturing within 1 Year Capital Lease Obligations Due within 1 Year Total Current Liabilities 0. 17.000 80.000 Long Term Liabilities: Long-Term Debt Capital Lease Obligations Deferred Income Taxes 167.500 Total Long-Term Liabilities 167.500 Chp

Answer rating: 100% (QA)

Solution Conclusion NPV at 14 Cost of Capital 391 As NPV is Greater than 0 at 14 discount of Cost of ... View the full answer