Question
3. a) What is the difference between the firms operating cycle and its cash conversion cycle? Why is it important for a firm to minimise
3. a) What is the difference between the firms operating cycle and its cash conversion cycle? Why is it important for a firm to minimise the length of its cash conversion cycle? [5 marks]
b) Star Manufacturers Ltd is evaluating a project that costs $280,000. The project has a seven year life and no salvage value. Assume that depreciation is prime-cost to zero salvage over the seven years. Star Manufacturers requires a return of 10 per cent on such projects. The tax rate is 30 per cent. Sales are projected at 60,000 units per year. Price per unit is $23.80, variable cost per unit is $10.52 and fixed costs are $100,000 per year.
i. Calculate the base case cash flow and NPV. [3 marks]
ii. Suppose that you think that the sales projection is accurate only to within 25 per cent. Evaluate the sensitivity of NPV to changes in that projection. [6 marks]
iii. Support the projections given are all accurate to within 5 per cent except for sales volume, which is accurate only to within 15 per cent. Calculate the NPV under the best and worst cases.
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