The Sisneros Company is considering building a chili processing plant in Hatch, New Mexico. The plant is

Question:

The Sisneros Company is considering building a chili processing plant in Hatch, New Mexico. The plant is expected to produce 50,000 pounds of processed chili peppers each year for the next 10 years. During the first year, Sisneros expects to sell the processed peppers for $2 per pound. The price is expected to increase at a 7 percent rate per year over the 10-year economic life of the plant. The costs of operating the plant, exclusive of depreciation, including the cost of fresh peppers, are estimated to be $50,000 during the first year. These costs are expected to increase at an 8 percent rate per year over the next 10 years.

The plant will cost $80,000 to build. It will be depreciated as a 7-year MACRS asset. The estimated salvage at the end of 10 years is zero. The firm’s marginal tax rate is 40 percent.

a. Calculate the net investment required to build the plant.

b. Calculate the annual net cash flows from the project.

c. If Sisneros uses a 20 percent cost of capital to evaluate projects of this type, should the plant be built?

d. Calculate the payback period for this project.

e. How many internal rates of return does this project have? Why?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...