: Ironlove Inc. considers a project to supply a car manufacturer with steel plates for six years. It expects to sell 100,000 tons of steel plates in the first year. After the first year, the projected supply of steel plates is expected to grow at 4% per year. It requires an initial investment of 44.4 million dollars in steel plate production machinery. The variable cost of the production is $440 per ton. The maintenance cost of the machinery needed in the production process will be 16 million dollars a year, and the company estimates the price of the steel plates at $945 per ton. To run this project, Ironlove needs to invest 10 million dollars in the net working capital at time zero. After the first year, the working capital requirements are expected to grow at 2% per year (if the Ironlove chooses to invest on this project).

The machinery belongs to Class 8, with a CCA rate of 20%. The company estimates that it can sell the machinery at a salvage value of 15 million dollars. Assume the company requires a 15% rate of return, and the tax rate is 35%.

Required:

a. (10 marks) Calculate the NPV for this project.

b. (2 marks) Calculate the average annual profit (or cost) of this project.

c. (2 marks) Is the IRR greater, equal or less than the discount rate?

Answer rating: 100% (QA)

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