Question
A business has the opportunity to invest 12 million immediately in new plant and equipment in order to produce a new product. The product will
A business has the opportunity to invest 12 million immediately in new plant and equipment in order to produce a new product. The product will sell at 80 each and it is estimated that 200,000 units of the product can be sold in each of the next four years. Variable costs are 56 a unit and additional fixed costs (excluding depreciation) are 1.0 million in total. The residual value of the plant and machinery at the end of the life of the product is estimated to be 1.6 million. The business has a cost of capital of 12 per cent. Required: (a) Calculate the NPV of the investment proposal. (b) Carry out separate sensitivity analysis to indicate by how much the following factors would have to change to produce an NPV of zero. (i) Initial outlay on plant and machinery. (ii) Residual value of the plant and machinery. (iii) Discount rate.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started