Company ABC is Manufacturer of footballs and is considered among top five market capitalized firms of Pakistan. The company is considering expanding its business operations in another product line by producing wooden Bats. In order to analyze the feasibility of this project the company needs the help of Investment analyst to evaluate this proposal. For this purpose the company has shared following information.

This project requires an initial investment of Rs.5000000 in equipment and it will be depreciated to zero on Straight line basis over 5 years. This system will generate 80,000 units each year which will produce revenues of Rs. 5400000 each year for next 5 years. However the variable cost charged to this project is estimated as Rs. 30 per unit and fixed cost is expected to be Rs. 120000 per year. The relevant Tax Rate is 37%. Calculate the Operating Cash Flows for this company.

This project will require an additional investment of Rs.75000 in Networking Capital so that company can efficiently run its daily operations. You are also supposed to calculate projected cash flows for this company. After calculating these estimated cash flows what do you think; should the company proceed for this new product if the required rate of return of this company is 16%?Being an investment analyst you are also supposed to calculate the profitability index and payback period for this project. It will help the management to check how long it will take to recover their initial cost and to how much efficiently they are utilizing their resources to create wealth for the owners of company.

Moreover this corporation has R&D department whose major responsibility is to continually work for development of product according to customer specifications. This department has issued a budgetary report for an existing product i.e. Sports football for Athletes. The R& D experts have given an opinion that Company should expand its business by producing high quality footballs with different sizes as required by international customers. Based on past experiences the company has estimated following figures for production of different sizes of footballs for next few years. According to R&D manger this process requires initial cost of Rs. 2500000, however for next 5 years it is expected to generate cash flows as follow

1 1020000

2 834000

3 603456

4 507234

5 502543

From given information you have to calculate the IRR for Company. This company uses 16% required rate of return to evaluate its projects. You are also supposed to highlight whether company should proceed with production of different sizes of footballs based on your calculations or not? You are also supposed to describe why companies use Average Accounting Rate of Return to evaluate its investment proposals?