Problem
Using relevant data provided about the chemical fertiliser project for. create cash flow table in brackets in the CF-Q3 sheet of the excel template provided, using the excel formulas as explained in week 6 E learning video) and calculate the MPV, IRR, PVI and discounted payback.
Grow more Ltd is planning to invest in a farm grade chemical fertiliser project that requires equipment with the purchase price of $92,000. The installation costs for the equipment would be $15,000. The transportation of the $4000 for the fertiliser producing equipment would be paid by the supplier.
Starting production with this equipment requires an additional investment of $29,000 in the inventory and $14,000 in accounts receivable. Whereas, there would be additional accounts payable of $24,000.
The equipment will have an economic life of seven years and would be depreciated at 12% straight line for the tax purpose. The salvage value of the equipment is estimated to be $17,000 at the end of the project life.
In order to analyse the effectiveness of the fertiliser to boost production, the management would spend $13,000 on clinical tests. The test revealed that the fertiliser would have some detrimental effect on the soil for multiple uses on any farmland. It requires further research for reducing the side effect of this fertiliser. Despite the adverse outcomes of the test the management has decided to go with the production. Expected sales in the first year would be $95,000 full stop sales are expected to grow at 18 percent in each year until the 7th year. Costs have been estimated to be 48% of sales revenue. In addition, there would be an annual fixed overhead cost of $7255.
This new project will increase the annual interest expense from 8000 to 9800. If the project is started, annual sales of the company's insecticide products will increase by $25,000 in the first year and that increased sales will further grow by 8% in each year until the 7th year. The cost of sale for the insecticide product is 80%. Whereas due to the start of the project the company's regular net earnings of $8000 from the same production facility would be discontinued.
The cost of capital is estimated to be either 11.27% or 15.36% the management has targeted a discount payback period of four years applicable corporate tax rate would be 34%.
• What would be your decision about this project at 11.27% and 15.36% cost of capital?
• What would be your comment in recommending this project considering qualitative?