Question
Benito Manufactures Pty is considering spending R8.5 million building a new manufacturing production facility on a site it bought for R1.25 million few years ago.
Benito Manufactures Pty is considering spending R8.5 million building a new manufacturing production facility on a site it bought for R1.25 million few years ago. The site is not currently in use and is currently valued at R2.5 million. If it goes ahead with the project, it expects to be able to sell the site at the end of the project for R3 million. No tax effects are expected on the proceeds of the sale of the land. The company will be manufacturing units and expects to be able to sell an average of 20 000 units in the first year and then increasing by 2 % from year 2 to year 5 at a price of R220 per unit. The variable costs to be incurred in production will total R110 per unit with fixed costs of R550 000 per year. The project will require a one-time investment in working capital initially and will be recovered at the end of the project. The company will be able to sell the production facility at R5 million. Company taxes are 35 % and depreciation allowances are calculated on a straight-line basis to zero over 5 years. The discount rate for the companys projects is 12%.
There is no inflation over this period. At the beginning of the project, the company will need cash of R2 million, market securities of R1.46 million, allowance for account receivables of R2 million, inventory of raw material and spare inventory amounting to R3 millions. The current ratio is 1.25
What is the estimated projects NPV?
Would you recommend that he build the manufacturing facility?
What is the number of the units required to break-even?
Comment on the rationale of using the accounting break-even analysis under certain circumstances to assess project viability
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