Project #51722 - Potential Capital Investment

Im sorry for the short notice. Please review the following instructions. Paper MUST show all work for all variables. THANK YOU!

 

 

 

  Please show ALL work for all variables.  Consider the following information regarding a potential capital investment:

  • $2 million has been incurred in research on this project.  This money

           will only be recovered if the project proceeds.

  • The project has a projected cost of $10 million spent evenly over the next two years.

  • The current incremental cost of capital for the company is 14%.

  • The company will use internally generated funds for this project if it proceeds.

  • The current incremental borrowing rate for this company is 10%.

  • The current tax rate is 40%.

  • The capital assets employed on this project total $3 million (included in the $10 million cost above).  These assets are expected to have a 10-year life and no salvage value.

  • Beginning in Year 3, the project is expected to generate $5 million per year in revenues (all cash).

  • The expected gross profit margin for this project is projected to be 60%.

  • Selling, general, and administrative costs are projected to be $1 million per year.

  • All revenues are expected to increase at 4% per year.

  • All expenses are expected to increase at 3% per year.

  • The company’s confidence in these projections is between 70% and 90%.

  • This project is expected to have an indefinite life, although the company is not sure what the future holds beyond a 5-year timeframe.

  • The company’s CFO believes that the division responsible for this project tends to exaggerate revenues.  She is unsure the extent of the exaggeration but believes that historically the division has overstated revenue projections between 10% and 20%.

     

    Directions:  Using Net Present Value, determine if the company should undertake the project.

 

Subject Business
Due By (Pacific Time) 12/12/2014 11:59 pm
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