1. Vita Smart Ltd is a leading high-tech company which is incorporated in Surrey, BC. The company wants to add an additional production line in Dec 2022. They hired you, a UCW graduate, to prepare a capital budgeting for the project.

Below is the information that your manager provided:

The facility is made up of one non residential building value at 45% of the total cost, 55% of manufacturing equipment. At the end of projects life, the equipment will be sold for an estimated $0.3 million the building will be sold for 0.8million.

Start-up costs include $2 million to build the production facilities, including land, building and equipment. The project will last for 6 years.

The company estimated that it is able to make 3000 of its new products smart testing machine units for labs, could be sold annually over the next 6 years at a price of $1550 each. Variable costs per unit are $350 and each years fixed costs is 50,000.

To handle the new product line, Vita Smarts net operating working capital would have to increase by an amount equal to 5% of sales revenues and will be fully recovered at the end of project.

However, if Vita introduces its new products, sales of its existing products will fall $11,000 per year. Vita hires a marketing research company on improving the operating strategy and operating the new machine and paid them $200,000. The company also hied an engineering team to tuning the new machine. The one-time tuning cost is $185,000. BC government also granted the company an innovation funding of $10,000 in Jan 2022

The manager is complaining the inflation will affect fixed cost, variable cost and the sales price in current years. The financial division has estimated the companys WACC is 12%. The company also assume the sales will increase 3% per year.

Question 1) Assume that you are confident of your estimates of all variables that affect the projects cash flows except unit sales and sales price.

Worst Case:

If product acceptance is poor, unit sales will be only 1800 units a year and the unit price will be only $900

Best Case:

A strong demand will produce sales of 4000 units and a unit price of $1750.

Probability:

The marketing department told you that there is a 25% chance of poor acceptance and 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case).

(a) What is the worst case NPV and the best case NPV? (b) What is the expected NPV for this project considering all possibilities?