Lee, Inc. is considering the production of a new line of soft drinks at its Springfield, IL plant. The CFO of Lee, Inc. is provided with the following information on the new project: • The expansion will require the immediate purchase of new machinery for $40,000,000. • The firm has spent $1,000,000 to train workers to use the new machinery. • The incremental sales from this project are expected to be $19,500,000 per year. The incremental operating expenses (excluding depreciation) are expected to equal $10,300,000 per year. • The company uses straight-line depreciation. The project has an economic life of 10 years. The machinery has a salvage value of $4,000,000 and will be sold for that amount at the conclusion of the project. • The company will increase net working capital by $1,100,000 at the beginning of the project, and it will be liquidated at the end of the project. • Lee Inc.’s marginal tax rate is 40%. • Lee Inc.’s weighted average cost of capital (WACC) is 10%. Based on this information, the initial net cash flow of the project (i.e., CF0) is $ ___. Based on this information, the project’s operating net cash flow in year 5 is $_. The IRR of this project is _%. The NPV of this project is $___.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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Lee, Inc. is considering the production of a new line of soft drinks at its Springfield, IL plant. The CFO of
Lee, Inc. is provided with the following information on the new project:
• The expansion will require the immediate purchase of new machinery for $40,000,000.
• The firm has spent $1,000,000 to train workers to use the new machinery.
• The incremental sales from this project are expected to be $19,500,000 per year. The incremental
operating expenses (excluding depreciation) are expected to equal $10,300,000 per year.
• The company uses straight-line depreciation. The project has an economic life of 10 years. The
machinery has a salvage value of $4,000,000 and will be sold for that amount at the conclusion of
the project.
• The company will increase net working capital by $1,100,000 at the beginning of the project, and
it will be liquidated at the end of the project.
• Lee Inc.’s marginal tax rate is 40%.
• Lee Inc.’s weighted average cost of capital (WACC) is 10%.
Based on this information, the initial net cash flow of the project (i.e., CF0) is $ _______.
Based on this information, the project’s operating net cash flow in year 5 is $_______.
The IRR of this project is _____%.
The NPV of this project is $_____.

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