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Confections & Chocolates Inc. (CCI) manufactures and distributes assorted chocolates. CCI is considering the development of a new assortment of liqueur flavored truffles. CCI’s CFO has collected the following information regarding the proposed project, which is expected to last 5 years:

  • The project can be operated at the company’s Baton Rouge plant, which is currently vacant.
  • The project will require that the company spend $9,000,000 today (t = 0) to purchase a new machine. The machine is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. Therefore, there is no annual depreciation expense. The company plans to use the machine for all 5 years of the project. At t = 5 (which is the project’s last year of operation), the equipment is expected to have a before-tax market value of $1,675,000.
  • The project will require an increase in net operating working capital of $360,000 at t = 0. The cost of the working capital will be fully recovered at t = 5 (which is the project’s last year of operation).
  • Expected truffle sales are as follows:

Year Sales

1 $3,150,000

2 4,600,000

3 6,300,000

4 4,950,000

5 4,325,000

  • The project’s annual operating costs (excluding depreciation) are expected to be 55% of sales.
  • The company’s tax rate is 25%.
  • The project has a WACC = 8%.

Given the data above, answer the following questions:

  1. What are the after-tax, net (or free) cash flows for the proposed project?
  1. What is the proposed project’s NPV?
  1. What is the proposed project’s IRR?
  1. What is the proposed project’s MIRR?
  1. Management is uncertain about the proposed project’s operating costs and tax rates. How will the proposed project’s NPV vary if operating costs vary between 53% and 58% (in 1% increments) and tax rates vary between 23% and 28% (in 1% increments)? Analyze changes in these variables at the same time. (Set up a 2-variable input Excel data table. Refer to the Excel Tools spreadsheet and Data Table video on the Canvas course website, Files page under the Background Materials/Excel Tools folder. Note that when you use the Excel Data Table feature, you can easily change assumptions about input values within your model and the Data Table values will simultaneously update. You may create your own table with Excel formulas to get the correct answers—but it is much easier to use the Excel Data Table feature.)

Management is uncertain about the market value of the equipment at the end of the project’s life. What is the lowest market value where management will be indifferent to undertaking the project? (Use Excel’s Goal Seek feature)

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