Abdulaziz Salam
Dylan Melton
Mirialy Quezada
Group 8
Dear Mr. Latecks,
Per your request, we would like to provide our recommendation based on the analysis of the project, as
outlined in the cash flow estimation spreadsheet.
Project Overview: The project involves a capital investment of $30,000,000.00 for equipment, along with
an initial net working capital requirement of -$5,500,000.00. The discount rate used in the analysis is
7.50%, with a tax rate of 21.00% and an inflation rate of 3.25%. The project spans over four years.
Cash Flow Estimation:
1. Capital Investment: The initial equipment cost is $30,000,000.00.
2. Net Working Capital (NWC): NWC requirements start at $5,500,000.00 and change over time.
3. Operating Cash Flows (OCF): OCF is calculated based on unit sales, pricing, variable costs, SG&A
expenses, and depreciation. The OCF for each year is provided in the spreadsheet.
Recommendation: Based on the analysis, the project does not appear to be financially viable. Here are
the key reasons for this recommendation:
1. Net Present Value (NPV): The NPV of the project is calculated to be -$2,723,337.17, indicating a
negative value. A negative NPV suggests that the project is not expected to generate sufficient
returns to cover the initial investment and provide a positive return to the company.
2. Internal Rate of Return (IRR): The IRR of the project is 4%, which is below the discount rate of
7.50%. An IRR lower than the discount rate also supports the recommendation of rejecting the
project.
3. Payback Period: The payback period is approximately 3.72 years, which exceeds the company's
desired payback period.
Justification: The negative NPV, lower IRR, and extended payback period indicate that the project is not
financially viable and may not provide the desired return on investment. Given the financial parameters
and cash flow projections, it is advisable to reconsider proceeding with this project.
Thank you for your attention to this matter.
Sincerely,
TinyTread financial analyst team