Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas.
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%.
Should the coffee packaging project be accepted? Why or why not? Compute the project’s IRR and NPV.
In addition, answer the following questions:
- 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.