NORTH – MIDDLE – SOUTH MILK COMPANY (NMS)

The NMS Milk Joint Stock Company was established in 1978 to engage in business and
production of dairy products in Vietnam. By 2020, the company had expanded to operate 12
processing and packaging plants, among which there was a small processing plant named Thanh
Cong.
Currently, the Thanh Cong plant is quite old and its machinery is needed to be renovated. The
financial director of NMS has just received a proposed cost breakdown for the plant renovation
as follows:
Machine and Equipment Overhaul: $4,400,000
Replacement of Electronic Devices: $2,600,000
Repairing Column Frames: $3,000,000
Other Repairs: $950,000
Total: $10,950,000

NMS's financial director believes that all these expenses can be depreciated over seven years
using the MACRS method. NMS's chief engineer estimates the annual operating costs of the
Thanh Cong plant after renovation as follows:
Fuel cost: $5,200,000
Labor cost: $3,500,000
Maintenance cost: $1,500,000
Other Expenses: $1,000,000
Total: $11,200,000

These costs typically increase with inflation, which is forecasted to be at 3.0% per year.
The current net book value of the Thanh Cong plant is only $2 million. The net book value of the
spare parts inventory is $400,000. This old plant can be sold on the market along with the spare
parts inventory for a total selling price of $3 million. The company will have to pay taxes on the
difference between the selling price and the remaining book value from the sale of the Thanh
Cong plant.
The chief engineer of NMS also suggests that the company consider another option of a major
overhaul by completely replacing the machinery with new ones. This option involves an
additional investment cost of $8,050,000 compared to just minor repair renovation. While this
new machinery setup won't significantly improve the revenue of the Thanh Cong plant, the
annual fuel, labor, and maintenance costs will decrease to:
Fuel cost: $4,400,000
Labor cost: $3,000,000
Maintenance cost: $500,000
Other Expenses: $500,000
Total: $8,400,000
The renovation of the Thanh Cong plant will cause it to be inactive for one and a half years from
the current time, regardless of whether or not new machinery is replaced. Based on past
experience, the company's CFO believes that the plant renovation will generate revenue of
approximately $15 million immediately after the plant is officially operational, and the annual
revenue increase will escalate along with the inflation rate for the subsequent years.
However, the Thanh Cong plant will not be able to operate indefinitely even after renovation. Its
economic life is likely not to exceed 10 years. The market value upon resale after that period will
be negligible.
NMS Company is a well-established company with a conservative capital structure. The cost of
capital for this company is estimated to be around 13%, assumed to be an appropriate discount
rate for this renovation project. This is a nominal discount rate, not the real discount rate. NMS's
corporate income tax rate is 35%.

Questions:
1. Calculate the NPV of the Thanh Cong Factory renovation project, in cases where there is
and isn't a complete investment in new machinery (7 marks).
2. Make assumptions about uncertainty of two variables (self-chosen) and conduct
simulation analysis (3 marks)
Note: You will need to use an Excel spreadsheet to perform the calculations. Afterwards, you'll
have to use a Word file to explain in detail your appraisal calculations.
You need to calculate NPV using the inflation-adjusted method.
Tax shields from depreciation are only calculated using the MACRS depreciation method over 7
years, but revenue and operating expenses need to be calculated after tax throughout the
remaining economic life after the renovation.