Reference no: EM131308694

Honeywell International (HON), one of the world’s premier manufacturers of industrial equipment, is evaluating a proposal to sell its Nylon 6 operations as part of a strategic plan to divest its commodity chemical operations. Honeywell’s CFO believes the firm’s Nylon 6 operations can be sold for $400 million. The CFO projects that next year’s sales of Nylon 6, which is used to produce engineered plastics and filaments, would be $600 million. Due to increasing demand for the sports apparel and fishing nets produced using Nylon 6, yearly sales are expected to grow at 4 percent per year in perpetuity. The company’s profit margin on the production and sale of Nylon 6 has averaged 10 percent of sales over the last 10 years. The Vice-President of the chemicals division believes the excess production capacity operated by Honeywell’s Ecuadorian competitors will prevent any improvement in margins for the foreseeable future. Assuming Honeywell has a tax rate of 30 percent and a required return of 10 percent, determine the internal rate of return for the proposed sale and explain whether or not the IRR for the proposed sale indicates that Honeywell should sell its Nylon 6 operations.