Question

FLIR is considering the purchase of a new manufacturing facility to produce drones that would cost $2,650,000. The facility is to be fully depreciated on a straight-line basis over 3 years. It is expected to have a scrap resale value of $250,000 at the end of 3 years. Toxic waste cleanup, at the end of the project life, is expected to cost $500,000, after taxes, Operating revenues from the facility are expected to be $1,950,000, and production costs are estimated at $525,000 for all years of operation, starting in T1. No inflation is expected. If the project is undertaken, a working capital investment of $250,000 is expected at the time of facility purchase, with full recovery at the end of the project life. The company uses a 9% discount rate for these types of projects; the corporate tax rate is 40 percent. FLIR has other ongoing profitable operations. Should the company undertake the project?

Determine the Operating cash flows for the project in all years.

Show the total cash flows of the project below that you will use for the NPV.

What is the project NPV? It's MIRR?

Determine the Terminal Value at the end of the project.

Answer 1

The Operating cash flows for the project in all years
	1	2	3
Revenue	19,50,000	19,50,000	19,50,000
Less :Production cost	5,25,000	5,25,000	5,25,000
Operating Profit	14,25,000	14,25,000	14,25,000
Less: Depreciation on manufacturing facility	800000	800000	800000
Net profit	6,25,000	6,25,000	6,25,000
Less: Corporate tax @40%	2,50,000	2,50,000	2,50,000
Net profit after tax	3,75,000	3,75,000	3,75,000
Add depreciation	8,00,000	8,00,000	8,00,000
Net cash inflow	11,75,000	11,75,000	11,75,000

Calculation of cashflow for Y-0
Purchase of machine	26,50,000
Working capital investment	2,50,000
Total cash outflow	29,00,000

Calculation of Non operating Cashflow for Y-3
Scrap value of machine	2,50,000
Toxic waste cost	5,00,000
Less: release of working capital	2,50,000
total	5,00,000

Calculation of Cashflow and NPV

Years	Cahflows	PVF @ 9%	PV
Year 0	-29,00,000.00	1.000	-29,00,000.00
Year 1	11,75,000.00	0.917	10,77,981.65
Year 2	11,75,000.00	0.842	9,88,973.99
Year 3	11,75,000.00	0.772	9,07,315.59
Year 3	-5,00,000.00	0.772	-3,86,091.74
NPV			-3,11,820.51

Since the NPV is negative at 9% interest, The project is not viable.

Calculation of terminal value of Cash inflow
Years	Cahflows	FVF @ 9%	FV
Year 1	11,75,000.00	1.1881	13,96,017.50
Year 2	11,75,000.00	1.09	12,80,750.00
Year 3	11,75,000.00	1	11,75,000.00
Total future value (terminal Value)			38,51,767.50

Calculation of present value of cash outflow		PVF @ 9%
Year 0	29,00,000.00	1	29,00,000.00
Year 3	500000.00	0.772183	3,86,091.74
Total present value			32,86,091.74

Calculation of MIRR

Terminal Value of Cash Inflows Modified Internal Rate of Return = - - 1 Present Value of Cash Outflows

Where

N= 3 years

Terminal Value = 38,51,767.50

Present Value = 32,86,091.74

Since the MIRR is less than 9% , the project is not viable.Therefore, MIRR = 5.44% (approx)