The company currently has sales of €10 million with operating costs of €7.5 million and the tax rate is 18%. The oil production and standardization machinery that the company has today was purchased 7 years ago at a cost of €6.5 million, and has a useful life of 12 years.
...According to the company's estimates, the new contract will bring an annual sales increase of 12% on the initial sales, every year until the 5th year when the company will also obtain the maximum capacity of the new investment.
Therefore, in order to be able to cover this additional demand and the larger quantities of olives that it will receive from the olive producers, it will have to make an investment in order to increase its capacity and is considering the implementation of an investment plan of €10 million.
….The energy produced will be used to run the plant, and together with the other machinery that will be installed will reduce the operating cost margin on sales to 75%.
...The useful (economic) lifetime of the equipment to be supplied is 12 years. The weighted average cost of capital you need to finance this investment plan from equity raising and bank borrowing is 5%.

D) Evaluate the investment plan based on the economic and technical data given to you, using the Net Present Value (NPV) and Internal Rate of Return (IRR) methods. Consider 2 additional scenarios where the risk of realizing the investment varies with a cost of capital of 4%, and 6%. Comment. (30 credits)

Answer rating: 100% (QA)

The given investment plan involves making new investment which leads to increase to sales cost and depreciation We need to analyze this on an incremen... View the full answer