Project 1 Calculations must be done in Excel – This question should be done using Method 1 as outlined in lecture 6 (i.e. Tax Effects, then Cash Flows then NPV).

QUT corporation projects their future unit sales for a new headphone. The projected unit sales are as below.

 1 2 3 4 5 Unit sales 75000 88000 120000 95000 60000

To produce the headphones, the initial net working capital of \$2,000,000 is required and additional net working capital is also required each year, which is 20% of the projected sales increase for the following year. The net working capital will be recovered at the end of a project. In addition, the initial installation cost of the machine for production is \$18,000,000. The machine will be depreciated for tax purposes using straight-line depreciation with the useful life of 6 years. Also, costs and unit price are as below.

 Fixed cost \$2,800,000 per year Variable cost \$295 per unit Price \$420 per unit

In five years, the machine can be sold for about 30% of its acquisition cost. The tax rate is 30% and the required rate of return is 15%.

Required

1. What is the NPV of the project?
2. Assuming that the project can be repeated indefinitely, what is the NPV∞ of the project?

Project 2 Calculations must be done in Excel – This question should be done using Method 1 as outlined in lecture 6 (i.e. Tax Effects, then Cash Flows then NPV).

As the financial advisor to All Star Manufacturing you are evaluating the following new investment in a manufacturing project: –

• The project has a useful life of 8 years.
• Land costs \$10m and is estimated to have a resale value of \$20m at the completion of the project.
• Buildings cost \$12m, with allowable depreciation of 6% pa reducing balance and a salvage value of \$10m.
• Equipment costs \$5m, with allowable depreciation of 10% pa reducing balance and a salvage value of \$1m. An investment allowance of 20% of the equipment cost is available.
• Revenues are expected to be \$15m in year one and rise at 5% pa.
• Cash variable costs are estimated at 30% of revenue.
• Cash fixed costs are estimated at \$3m pa.
• Managerial salaries of \$800,000 will be allocated to the project, but these managerial positions will be unaffected by the acceptance of the project.
• An amount of \$200,000 has been spent on a feasibility study for the new project.
• The project is to be partially financed with a loan of \$13.5m to be repaid annually with equal instalments at a rate of 5% pa over 8 years.
• Except for initial outlays, assume cash flows occur at the end of each year.
• The tax rate is 30% and is payable in the year in which profit is earned.
• The after-tax required return for the project is 11% pa.

Required

1. Calculate the NPV. Is the project acceptable? Why or why not?
2. Conduct a sensitivity analysis showing how sensitive the project is to revenues, fixed costs and to the required rate of return.

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