1. Company ABC is one of the leading firms in the food industry. As the CEO, you are considering a new product line. A series of meetings have been scheduled with the relevant managers for this project. In the first meeting, Sophia, the head of marketing team, provides the following basic information on the project.

The initial investment is 9 million. It will last for 3 years and the equipment will be depreciated in a straight line over the project. The salvage value of the equipment will be zero at the end of the project. The cost per unit of the new product is 5 and the sale price is 10. Each year ABC can sell 1 million units. The tax rate of ABC is 20% and the cost of capital is 10%.

REQUIRED:

1. Please calculate the NPV of this project given the information provided by Sophia.

[6 marks]

2. In the second meeting, you received an update on the net working capital (NWC) of this project, which was missed in the first meeting. Specifically, cash for this project will be 10% of revenue each year, inventory will be 5% of revenue, accounts receivable will be 20% of revenue, and accounts payable will be 5% of revenue. The NWC will be released at the end of the project. Please calculate the NWC in the end of each year and its annual changes.

[7 marks]

3. In the third meeting, you are informed that the information on depreciation should be updated. The straight-line depreciation rule is still applied but the book value of the equipment at the end of the project should be 3 million. In addition, the equipment can be sold at a price of 4 million at the end of project. Please calculate the after-tax cash flow from the asset sale. Furthermore, please update your NPV calculation based on all related information.

[8 marks]

4. Latest information shows that the price of production materials for the project may increase in the near future. Accordingly, you have a concern about the sensitivity of your NPV (in Part iii) to costs. Please calculate the elasticity of NPV to the costs.

[9 marks]