I work for a company that wishes ME to evaluate the economic feasibility of producing alloy wheels for the automobile market. The important financial parameters for the project are as follows:
Capacity: 10,000 wheels per year
Variable Cost: R1,500 per wheel
Fixed Cost: R20 million per year
Capital Cost: R30 million
Salvage Value: 0
Selling Price: R5,000 per wheel
Tax Rate: 40%
Interest Rate: 12% (payable on the capital loan; assume the capital itself is not repaid)
Minimum Acceptable
The plant will be constructed in one year, but I will need to borrow the full capital cost at the beginning of year one.
Answer the following questions:
A. What is the annual revenue?
B. What is the annual tax payment?
C. What is the NPV for the project?
D. What is the IRR?
E. Will the company agree to invest in this project? Why?
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