Banana group is one of the largest MNC in the world, with more than 20 years of extensive experience in the exporting of bananas to Central Asia countries with the purpose of selling there. It wants to open a new subsidiary in Almaty which will sell exported bananas to the citizens of Almaty. They are evaluating a project (subsidiary) with the following characteristics: -Fixed capital investment includes the purchase of five refrigerators which cost 92,000 tenge each; two packaging machines 105,165 tenge per unit; two units of some equipment which is 25,000 tenge/unit; one truck 40,000 tenge; a factory of 1,000 meters square and 30,000 tenge per meter square, the factory seller will provide a ten percent discount from the total cost of factory; and some other fixed capital costs amount in 20,000 tenge. -The project has an expected five-year life. -The initial investment in net working capital is 1,500,000 tenge -The fixed capital is depreciated using straight line method -Sales are 6,500 kg in Year 1. They grow at a 26 percent annual rate for the next year, then 30%, then 35%, and last year 40% -Selling price is 750 tenge per kg. -Fixed cash operating expenses include rent of one apartment and salaries. The monthly rent payment is 135,000 tenge. Monthly salary of all employees combined is 160,000 tenge. -Variable cash operating expenses are 30 percent of sales in for each year -Marginal tax rate is 20 percent. Banana Group will sell its fixed capital investments for 2,100,183.33 tenge when the project terminates and recapture its investment in net working capital. Income taxes will be paid on any gains. If taxable income on the project is negative in any year, the loss will offset gains elsewhere in the corporation, resulting in a tax savings. -WACC is 23,54% -The CFO has appointed You, CFA, Investment Valuation Advisors, a third-party valuator, to perform a standalone valuation this new project Required: a) Evaluate a project for feasibility. Use all the investment criteria: NPV, PI, IRR, Payback Rule (Show all calculations). b) Give some meaningful comments to top management, whether the company should proceed with certain project or not?
Banana group is one of the largest MNC in the world, with more than 20 years of extensive experience in the exporting of bananas to Central Asia countries with the purpose of selling there. It wants to open a new subsidiary in Almaty which will sell exported bananas to the citizens of Almaty. They are evaluating a project (subsidiary) with the following characteristics:
-Fixed capital investment includes the purchase of five refrigerators which cost 92,000 tenge each; two packaging machines 105,165 tenge per unit; two units of some equipment which is 25,000 tenge/unit; one truck 40,000 tenge; a factory of 1,000 meters square and 30,000 tenge per meter square, the factory seller will provide a ten percent discount from the total cost of factory; and some other fixed capital costs amount in 20,000 tenge.
-The project has an expected five-year life.
-The initial investment in net working capital is 1,500,000 tenge
-The fixed capital is
-Sales are 6,500 kg in Year 1. They grow at a 26 percent annual rate for the next year, then 30%, then 35%, and last year 40%
-Selling price is 750 tenge per kg.
-Fixed cash operating expenses include rent of one apartment and salaries. The monthly rent payment is 135,000 tenge. Monthly salary of all employees combined is 160,000 tenge.
-Variable cash operating expenses are 30 percent of sales in for each year
-Marginal tax rate is 20 percent. Banana Group will sell its fixed capital investments for 2,100,183.33 tenge when the project terminates and recapture its investment in net working capital. Income taxes will be paid on any gains. If taxable income on the project is negative in any year, the loss will offset gains elsewhere in the corporation, resulting in a tax savings.
-WACC is 23,54%
-The CFO has appointed You, CFA, Investment Valuation Advisors, a third-party valuator, to perform a standalone valuation this new project
Required:
a) Evaluate a project for feasibility. Use all the investment criteria:
b) Give some meaningful comments to top management, whether the company should proceed with certain project or not?
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