DEF Inc. is considering a new project. In order to undertake the new project, DEF Inc. will make use of a vacant warehouse the company owns. The warehouse has a value today of $9,000,000. The company estimates that it could sell the warehouse at the end of the project for $10,500,000. The company would need to purchase a new machine. The machine will cost $5,600,000. It will take an additional $300,000 to get the machine installed and operating. The machine will be used for the project and the project will run for 7 years. The expected salvage value of the machine at the end of the project is $500,000. The marketing department has prepared a sales forecast for the next 6 years. The forecast is shown below: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Units sold 550,000 750,000 800,000 620,000 430,000 240,000 120,000 Price/unit ($) 20.50 22.00 21.00 19.50 18.00 16.00 15.00 The production department has prepared a cost forecast for the next 6 years. The forecast is shown below: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Variable cost/unit ($) 9.50 10.00 10.50 11.50 12.50 13.00 13.50 In addition to these variable costs, the company would need to hire a project manager. The project manager’s contract would run for the 7 years of the project. The project manager’s salary in year 1 would be $220,000. Her salary would then increase by 5% per year during the life of the project. You may assume that the salary is paid at the end of each year. The company believes that the project will require an initial investment in operating net working capital of $170,000. Thereafter, operating net working capital will be 8% of sales. The CCA rate on the machine is 20%, the tax rate is 38%, and the required rate of return is 12%. There is no CCA on the warehouse. You may assume the machine’s asset class will remain open at the end of the project. The company uses the Modified Internal Rate of Return to decide whether to accept a project or not. The reinvestment rate used is 10%. What is the project’s MIRR? Should the company accept or reject the project?
DEF Inc. is considering a new project. In order to undertake the new project, DEF Inc. will make use of a vacant warehouse the company owns. The warehouse has a value today of $9,000,000. The company estimates that it could sell the warehouse at the end of the project for $10,500,000. The company would need to purchase a new machine. The machine will cost $5,600,000. It will take an additional $300,000 to get the machine installed and operating. The machine will be used for the project and the project will run for 7 years. The expected salvage value of the machine at the end of the project is $500,000.
The marketing department has prepared a sales forecast for the next 6 years. The forecast is shown below:
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
|
Units sold |
550,000 |
750,000 |
800,000 |
620,000 |
430,000 |
240,000 |
120,000 |
|
Price/unit ($) |
20.50 |
22.00 |
21.00 |
19.50 |
18.00 |
16.00 |
15.00 |
The production department has prepared a cost forecast for the next 6 years. The forecast is shown below:
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
|
Variable cost/unit ($) |
9.50 |
10.00 |
10.50 |
11.50 |
12.50 |
13.00 |
13.50 |
In addition to these variable costs, the company would need to hire a project manager. The project manager’s contract would run for the 7 years of the project. The project manager’s salary in year 1 would be $220,000. Her salary would then increase by 5% per year during the life of the project. You may assume that the salary is paid at the end of each year.
The company believes that the project will require an initial investment in operating net working capital of $170,000. Thereafter, operating net working capital will be 8% of sales.
The CCA rate on the machine is 20%, the tax rate is 38%, and the required rate of return is 12%. There is no CCA on the warehouse. You may assume the machine’s asset class will remain open at the end of the project.
The company uses the Modified Internal Rate of Return to decide whether to accept a project or not. The reinvestment rate used is 10%. What is the project’s MIRR? Should the company accept or reject the project?
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