The ABC Chemicals company wants to evaluate the possibility of manufacturing over the next 5 years a new product. The initial investment would be $ 1,500,000 (75% of fixed assets and 25% of current assets) and The annual production during the 5 years of production would be 150,000 units per year. The sale price is $ 12 per unit, and the production costs and expenses affected:
Costs and Fixed Expenses:
Administrative expenses $ 50,000 / year
Manufacturing expenses $ 75,000 / year
Cost Variables:
Direct Labor $ 1.75 / unit
Raw Material $ 1.5 / unit.
Energy $ 0.25 / unit.
Distribution $ 0.15 / unit.
General average inflation is estimated at 4% per year, the salvage value at 15% of fixed assets and that of recovery of current assets in 100%; for the latter the additional investment depends on the investments of the inflation, depreciation is in a straight line for 10 years, the tax rate is 35% and the real rate of 10% annual company.
a) .- Is this investment convenient based on NPV and IRR after considering investment and taxes?
b) .- Make a sensitivity analysis of the main variables of the financial model.
