Assignment: Risk Methodologies
Apix is considering coffee packaging as an additional diversification to its product line. Here's information regarding the coffee packaging project:
o 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
o Project and equipment life: 5 years
o Sales: $27 million per year for five years
o Assume gross margin of 50% (exclusive of depreciation)
o Depreciation: Straight-line for tax purposes
o Selling, general, and administrative expenses: 10% of sales
o 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:
o Do you believe that there was sufficient financial information to make a solid decision on what to do?
o Was there further financial information that you required that was not provided to you?
o What financial figure do you believe was the determinant to your decision and why?
o How would you be able to apply this particular financial information to other situations?
o Discuss risk methodologies used in capital budgeting.
Format your assignment according to the following formatting requirements:
o The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
o The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
o Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.