Rare Agri - Products Ltd . is considering a new project with a projected life of seven
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Question:
Rare AgriProducts Ltd is considering a new project with a projected life of seven years. The project falls under the governments subsidy program for encouraging local agricultural products and is eligible for a onetime rebate of on any initial equipment installed for the project. The initial equipment IE will cost $ At the end of year An additional equipment AE costing $ will be needed at the end of year At the end of seven years, the original equipment, IE will have no resale value but the supplementary equipment, AE can be sold for $ A working capital of $ will be needed.
The project is forecast to generate sales of agriproducts over the seven years as follows:
Year units
Year units
Years units
Years units
A sale price of $ per unit for the first two years is expected and then decline to $ per unit thereafter as the newness of the product loses some sheen. The variable expenses will amount to of sales revenue. Fixed cash operating expenses will amount to $ per year.
The company falls in the tax category for ordinary income and tax category for capital gain.
The initial equipment is depreciated as per the year MACRS system and the additional equipment is depreciated on a straightline basis. In the event of a negative taxable income, the tax is computed as usual and is reported as a negative number, indicating a reduction in loss after tax.
The initial financing of the project will be carried out as follows: equity and debt. The company paid $ per share in the form of dividend this year, which is likely to increase at a rate of per year for the near future. The current price of the companys stock is $ per share. The bank loan is likely to be arranged at an interest rate of pa
You are required to:
Compute the appropriate rate for discounting the cash flows of
the project marks
Compute the initial investment required marks
Compute the earnings before taxes for years through
Compute the earnings after taxes for years through
Compute the OCF for years through
Compute the Terminal cash flow
Compute the FCF for years through
Compute the NPV and IRR
Should the project be accepted?
NBPlease show all workings and formulas
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