Project Analysis Example 3
Kerry Back
- The market for a product is declining. It is estimated that sales of 1 million units per year can be maintained for the next 5 years, but the sales price will fall by 5% per year as follows:
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| 19 | 18.05 | 17.15 | 16.29 | 15.48 |
- COGS and SG&A expenses are projected to stay constant at 10 million per year and 5 million per year, respectively.
- Current inventory is $2 million, receivables are $2.4 million, and payables are $1.6 million.
- Future inventory is projected to be 20% of COGS, recievables are projected to be 16% of sales, and payables are projected to be 16% of COGS, with all working capital recovered in five years.
- The current book value of equipment used in production is $7 million. The planned depreciation is $5 million in the upcoming year and $2 million the following year.
- The equipment will have zero salvage value after five years.
- If production is discontinued now, the equipment could be sold for $4 million, and all working capital could be recovered now.
- The cost of capital is 12%.
- The corporate tax rate is 30%.
- Should production be discontinued now?