Apix is considering coffee packaging as an additional diversification to its product line. Here’s information regarding the coffee packaging project:
- Initial investment outlay of $40 million, consisting of $35 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year
- Project and equipment life: 5 years
- Sales: $27 million per year for five years
- Assume gross margin of 50% (exclusive of depreciation)
- Depreciation: Straight-line for tax purposes
- Selling, general, and administrative expenses: 10% of sales
- Tax rate: 35%
Assume a WACC of 10%.
Should the coffee packaging project be accepted? Why or why not? Compute the project’s IRR and NPV.
In addition, answer the following questions:
- Do you believe that there was sufficient financial information to make a solid decision on what to do?
- Was there further financial information that you required that was not provided to you?
- What financial figure do you believe was the determinant to your decision and why?
- How would you be able to apply this particular financial information to other situations?
- Discuss risk methodologies used in capital budgeting.