Business, 15.02.2022 14:00 sleepingfrosty5611
QX Corp. is a manufacturer of automotive brake pads for original equipment manufacturers (OEMs). TESLA has approached them to manufacture brake pads for the Model 3. TESLA is currently not a customer and their brake pad is unique and requires a specialized machine. The contract will be for 7 years and will require the purchase of the specialized machine that will be needed to manufacture the brake pad as well as hiring additional employees. You are a financial analyst in the Financial Planning & Analysis Department. The production department supplied you with the following:
--Cost of the machine: $54,500,000
--QX will sell the following number of brake pads per year.
Year 1 - 100,000 , Year 2 - 110,000, Year 3 - 120,000, Year 4 - 125,000, Year 5 - 110,000, Year 6 - 100,000, Year 7 - 100,000, Year 8 - 90,000
-- Sales price per pad is $200.00
-- The material cost per brake pad to manufactue is expected to be $30 per pad for all seven years
-- The labor cost per brake pad is expected to be $20 per pad for all seven years
-- Operating expenses (not including depreciation) will be 10.0% of COGS
-- The equipment will be depreciated based on the following MCARS tax rates which are:
Year 1 - 20.0%, Year 2 - 32.0%, Year 3 - 19.2%, Year 4 - 11.52%, Year 5 - 11.52% and Year 6 - 5.76%
-- The equipment will be sold for $1,000,000 at the end of year 8.
-- Tax Rate is 25%
-- Management requires a rate of return on this project of 14%
Required:
You are to prepare an IRR and NPV analysis and recommend whether to ACCEPT or REJECT the project and WHY?
Answers: 2
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