Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear,...

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Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas.

Apix is considering coffee packaging as an additional diversification to its product line. Here’s information regarding the coffee packaging project:

Initial investment outlay of $40 million, consisting of $35 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year
Project and equipment life: 5 years
Sales: $27 million per year for five years
Assume gross margin of 50% (exclusive of depreciation)
Depreciation: Straight-line for tax purposes
Selling, general, and administrative expenses: 10% of sales
Tax rate: 35%

Assume a WACC of 10%.

Should the coffee packaging project be accepted? Why or why not? Compute the project’s IRR and NPV.

In addition, answer the following questions:

Do you believe that there was sufficient financial information to make a solid decision on what to do?
Was there further financial information that you required that was not provided to you?
What financial figure do you believe was the determinant to your decision and why?
How would you be able to apply this particular financial information to other situations?
Discuss risk methodologies used in capital budgeting.

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For assistance with your assignment, please use your text, Web resources, and all course materials.

Shakeel · Accepted Answer

Apix ltd
Apix ltd
Evaluation of coffee packaging project
Presented by
xxxxxxxxxx
Apix is considering coffee packaging as an additional diversification to its product line. The information regarding the project is as follows - 
1
Financial data and information of project
Initial investment outlay of $40 million, consisting of $35 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year
Project and equipment life: 5 years
Sales: $27 million per year for five years
Assume gross margin of 50% (exclusive of depreciation)
Depreciation: Straight-line for tax purposes
Selling, general, and administrative expenses: 10% of sales
Tax rate: 35%
WACC of 10%.
Financial feasibility of project
The financial feasibility of project is carried out by two capital budgeting tools – 
Net present Value (NPV) and
Internal Rate of return (IRR)
For a new project where initial investment is required there is expected future cash flow each year the life of the project, we use the NPV to assess the feasibility of project. Purchasing of new equipment for our patient radiology center is a kind of new project where benefit will be availing as a cash flow for the life of the equipment
NPV is calculated by summing up the PVs of all the future cash flows and then deduct the initial cash outlay. The PVs of cash flows are determined through discounting the expected cash flows by an appropriate discount rate which is generally the WACC.
So, if NPV comes positive, project should be accepted, otherwise rejected.
The internal rate of return (IRR) of a project is the discount rate which makes its net present value equal to zero. This is also known as yield on investment, marginal efficiency of capital, marginal productivity of capital etc. 
The generally employed acceptance criterion with the IRR is to compare the IRR with the required rate of return, known also as the cutoff or the hurdle rate. If the internal rate of return exceeds the required rate, the project is accepted, otherwise rejected.

Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas. Apix is considering coffee packaging as an additional...

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