150–200 words per question Apix is considering coffee packaging as an additional diversification to its product line. Here’s information regarding the coffee packaging project: 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 Project and equipment life: 5 years Sales: $27 million per year for five years Assume gross margin of 50% (exclusive of depreciation) Depreciation: Straight-line for tax purposes Selling, general, and administrative expenses: 10% of sales Tax rate: 35% Assume a WACC of 10%. In addition, answer the following questions: • Should the coffee packaging project be accepted? Why or why not? Compute the project’s IRR and NPV. • Do you believe that there was sufficient financial information to make a solid decision on what to do? • Was there further financial information that you required that was not provided to you? • What financial figure do you believe was the determinant to your decision and why? • How would you be able to apply this particular financial information to other situations? • Discuss risk methodologies used in capital budgeting.
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