Question

Please explain what you did

Splat Candies is planning on building a new gumball factory that will have an estimated construction cost of $44 million. One-quarter of the cost of construction will be spent in the first year, with the remainder spent in the second year. During the third year (first year of operation), the gumminess of the gumballs slows down production so that profit of only $8 million is achieved. After that, the net yearly profit is $12 million for 9 years. At the end of the 12-year project life, the factory is shut down and sold as scrap metal for $2 million. Assume MACRS depreciation with a 7 year recovery period, a 9% interest rate and a corporate tax rate of 29%.

(a) Make a table showing cash flow, depreciation charge, taxes paid and after-tax cash flows for the 12 year project life, plus the year after the project ends. Excel is very useful for this.

(b) What is the cumulative net present value of the plant? (Hint: see Towler example 9.4)

(c) Calculate overall after-tax ROI for the project.

(d) Determine the internal rate of return (IRR, which is the same as DCFROR) for the project.

Answer 1