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A manufacturer of designer rugs is currently evaluating an opportunity to update one of its production plants. This will involve installing new, efficient production equipment
A manufacturer of designer rugs is currently evaluating an opportunity to update one of its production plants. This will involve installing new, efficient production equipment and a large solar power system. At present, the firm incurs $ in energy costs pa These costs are currently expected to continue to grow by pa if the firm does not take any action. The new solar system will supply all of the facility's energy requirements. Key details concerning the expansion are provided below:
The new equipment and solar system will cost $ million and will have a useful life of years. The equipment and solar system will require major maintenance at the end of years and These maintenance activities are expected to cost $ and $ respectively.
As a result of the upgrades, the firm's:
Sales revenues are expected to grow by $ in the first year after the upgrades. These sales are further expected to grow by pa over the life of the project. On average, cost of sales is of sales revenues. Labour costs are expected to decline by $ in the first year after the upgrades. These savings are expected to continue to decline by a further pa over the life of the project.
Cleaning costs will grow by $ pa These costs are associated with the additional cleaning works needed to maintain the performance of the solar system.
The firms tax rate is
The firm requires a required rate of return on all potential investments, irrespective of any potential environmental benefits. All calculations must be performed in Excel.
Required
In relation to the above proposal:
Calculate the annual after tax cash flows and annual after tax profit.
Calculate the payback period.
Calculate the net present value.
Calculate the internal rate of return.
Calculate the accounting rate of return based on the average and initial investment.
Based on an assessment of the above, strategic factors and sustainability factors,
discuss whether the firm should go ahead with the proposal.
Discuss how sensitive your recommendations are to changes in assumptions in
regards to the financial impact of the new capital investment. In your discussion,
include examples which illustrate how changes to at least two assumptions impact the financial analysis.
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