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.
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%.
- What is the NPV of the project?
- 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.
- Calculate the NPV. Is the project acceptable? Why or why not?
- 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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