Bravo company is considering a plan to construct a new manufacturing plant to expand its operations. An attractive piece of land is available which could be purchased immediatley for $100,000. Bravo would build a plant on the land at a cost of $200,000 and outfit the new plant with $90,000 of new equipment. As the plant would be of a pre-fabricated design, and as equipment is available for immediate delivery, the fully outfitted facility could be ready for use in only 2 months. The plant has an estimated 20 year life and would be depreciated over that life on a straight line basis to an estimated $100,000 salvage value. The equipment has an estimated 10 year life and would also be depreciated on a straight line basis to its salvage value of $10,000. Forecasts of production levels and future sales indicate that the product of the plant could be sold for cash income before taxes of $150000, per year for each of the 10 years the plant would be operated. At the end of the 10 years, Bravo would sell the entire facility. Bravo anticipates receiving $225,000 for the land, $130,000 for the building, and $10,000 for the equipment. An investment of $30,000 in working capital would be necessary immediately. This amount would remain unchanged over the life of the facility and could be retrieved in full at the end of the 10 year period. Bravo has a 12% cost of capital and pays taxes at a rate of 34%.
1). Determine the cash flows from the project. 2). Calculate a). payback period b). Net present Value (NPV) c). Interest Rate of Return (IRR)
3). What decision (accept or reject) should Bravo make? Why? 4). Obtain the terminal value, fully invested NPV, and fully invested IRR for reinvestment rates of: 0%, 5%, 10%, 12%, and 15%. Interpret these figures.
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