Rare Agri-Products Ltd. is considering a new project with a projected life of seven (7)years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. At the end of year 1, An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7)years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed.The project is forecast to generate sales of agri-products over the seven years as follows:Year 170,000 unitsYear 2100,000 unitsYears 3-5250,000 unitsYears 6-7325,000 unitsA sale price of $150per unitfor the first two years is expected and then decline to $90 per unitthereafter as the newness of the product loses some sheen. The variable expenses will amount to 30% of sales revenue. Fixed cash operating expenses will amount to $1,100,000 per year.The company falls in the 25% tax categoryfor ordinary income and 40% tax category for capital gain.The initialequipment is depreciated as per the 7-year MACRS systemand the additional equipment is depreciated on a straight-line basis. In the event of a negative taxable income, the tax is computed as usual and is reported as a negative number, indicating a reduction in loss after tax.The initial financing of the project will be carried out as follows:-55% equity and 45% debt. The company paid $1.50 per share in the form of dividend thisyear, which is likely to increase at a rate of 3% per year for the near future.The current price of the company’s stock is $9.50per share. The bank loan is likely to be arranged at an interest rate of 13.5% p.a. Show working where necessary. A. Compute the FCF for years 1 through 7 B. Compute the NPV and IRR C. Should the project be accepted?
Rare Agri-Products Ltd. is considering a new project with a projected life of seven (7)years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. At the end of year 1, An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7)years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed.The project is
usual and is reported as a negative number, indicating a reduction in loss after tax.The initial financing of the project will be carried out as follows:-55% equity and 45% debt. The company paid $1.50 per share in the form of dividend thisyear, which is likely to increase at a rate of 3% per year for the near future.The current price of the company’s stock is $9.50per share. The bank loan is likely to be arranged at an interest rate of 13.5% p.a.
Show working where necessary.
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