Question: CSM, Inc., is considering an investment in Earthilizer, a new organic fertilizer made from dairy farm waste
Developed by CSM's ag-division over the past 3 years in response to: Growing demand from organic farmers and more restrictions on the disposal of cattle manure
Project will be "up and running" by the end of 2007, with first year of sales in 2008
CSM financed from internally generated cash flows; firm is unlevered. Very promising investment opportunity. Product has undergone extensive testing. Product is wholly organic, and is cheaper than traditional applications
Sales $1 million in 2008. Growing 10% annually throughout the 5-year planning period
Operating Costs: COGS 67.40% of sales. Operating expenses before depreciation are 10% of sales (variable expenses) plus an annual fixed expense of $115K
Straight-line depreciation: PPE 10-year life and zero salvage value
30% tax rate
NWC of $250 K at 2007 year-end
2008 - 2012 NWC requirements = 25% of Earthilizer's sales in the year
CAPEX $330K in 2007 (Zero in all future years)
Project end = 2012 (Salvage value = book value in 2012)
Estimate the (free) cash flows of the project and the NPV/IRR of the project if the appropriate discount rate is 13.25%