XYZ is considering a proposal to produce feed. The feed project requires an investment in new plant
Question:
XYZ is considering a proposal to produce feed. The feed project requires an investment in new plant and equipment of $2.20 million. This could be depreciated for tax purposes straight-line over 10 years to zero salvage value. However, the plant and equipment will be sold when the project is terminated for $1.8 million. The project will generate sales for 3 years and will be terminated at the end of year 4. Year 1 sales of feed are expected to be 10,000 tons at $520 per ton, and thereafter quantity is forecasted to grow by 4% a year while the price remains constant. Costs are expected to be $416 per ton. Profits are subject to tax at 21% and the cost of capital is 13%. The project requires the following amounts in working capital, $450,000, $520,000, $540,800, $562,432 in year 0 – year 3, respectively and the accumulated level of working capital in year 3 will be recovered in year 4.
a. Determine the values of yellow background cells in the spreadsheet file and decide if XYZ should invest in this project? Explain.
b. What are possible concerns or questions for further analysis? Explain.
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart