IM DZ Chocolate Factory has just completed a 2 year $1.2 million market study related to the
IM DZ Chocolate Factory has just completed a 2 year $1.2 million market study related to the introduction of a new gourmet chocolate bar. Based on the results of the marketing survey, the company will be able to sell $382.4M in product. The increased variable costs are estimated at $320.0M and fixed costs are estimated to be an additional $28.4 million per year. The firm has a tax rate of 40% and projects require a 16 percent rate of return.
The project will require an investment of $85.5 million to build the production facilities on land the company currently owns. The company will spend $16.3 million in net working capital and the land has a current market value of $4.5M. The million in production facilities belong in CCA class that has a CCA rate of 15%. The asset class will remain open at the end of the project. The project is expected to last 10 years and the assets will be sold for an estimated $20.4 million (excluding the land). The company will incur a one-time fully tax deductible expense of $3.3 million at time 0.
- Calculate the initial investment for the project (CF0). Show your work!
- Calculate the present value of the cash flows after tax from the operations. Show your work!
- Calculate the present value of the CCA tax shield. Show your work!
- Calculate the present value of the terminal cash flows. Show your work!
- Calculate the NPV of the project and explain your decision.
- Is the IRR greater than, equal to or less than the required rate of return of 16 percent? Calculate the IRR and use the NPV profile below to help explain your answer.