A five-year investment project involving an initial outlay of $100.00MM will generate net sales of $60.00MM in the first year of operation. Sales are expected to grow at a rate of 5% in each of the four years thereafter. The operating profit margin is expected to be 35% of sales, and the capital equipment will be depreciated on a straight line basis over the five year period. Additional current assets equal to 30% of the annual sales volume will be required at the beginning of each sales year, and current liability financing equal to 24% of sales is available. Current asset investments will be recovered and current liabilities completely paid off at the end of the five year investment term. The company will also be able to sell the used capital equipment end earn an after tax revenue of $10.00MM at the end of the fifth year. The company pays taxes at a rate of 25%, and the weighted average cost of capital is 7.5%.
• Create a table showing the calculation of the operating net cash flow using adjusted NOPAT method.
• Calculate the net present value and internal rate of return for the investment project.
• Write a short memo explaining your analysis and calculations, and recommending to the company whether or not the investment project should be undertaken. Support your recommendation with an explanation of the meaning of your net present value calculations. If you recommend that the project not be undertaken, state the conditions under which the company should invest in the project, if at all.