The Foxo company is interested in investing to produce and sell a new product . This is expected to be a 5 years project . The CFO of the firm has the following informations on his desk .
The firm has idle plant and machinery in place that could be deployed in this project .These machines as well as the facility were bought many years ago for Rs 10 millions and currently have a book value of Rs. 4 M . These machines are depreciated at a rate of Rs 1 M per year . These machines require re-configuring expenses of about Rs 2 M . Further the plant needs to be refurbished at a cost of Rs 3 M . These modifications are expected to take a period of about 6 months .
Production is expected to be at 50% of capacity in the first six months and will be increased to about 80% of capacity thereafter . The machines are capable of producing 1000,000 units of the product each year . The direct material costs are expected to be Rs 10 per unit and the direct labor costs are expected to be Rs 25 per unit . SGA expenses are Rs 12 M a year . The expected selling price of the product is expected to be Rs 75 . The plant and the equipment expenditures are expected to be depreciated straight line over a period of 5 years . Salvage value of the plant and equipment is Rs 2 M . Taxes are 34% . The discount rate is 12%
The CFO is trying to understand whether this is a valuable project for the firm . The firm's credit policy requires working capital @ 5% of revenues .
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