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A new project with an expected life of 3 years is expected to result in an increase in sales revenue of R20 million in
A new project with an expected life of 3 years is expected to result in an increase in sales revenue of R20 million in the first year, R30 million in the second year and R10 million in the third year. Operating costs will amount to 70% of sales revenue and the company is required to make an investment in working capital of R6 million at the beginning of the project, which is recoverable at the end of the life of the project. The cost of the project is R18 million and the residual value at the end of 3 years is R11 million. The required rate of return is 14%. Assuming no taxation, a) What is the project's NPV? (8 marks) b) What is the project's IRR? (4 marks) c) Must the company invest in the project and why? (3 marks)
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