Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

DrillOng Sdn Bhd has developed a powerful new hand drill that would be used for woodwork and carpentry activities. It would cost $1 million to

DrillOng Sdn Bhd has developed a powerful new hand drill that would be used for woodwork and carpentry activities. It would cost $1 million to buy the equipment necessary to manufacture the drills, and it would require net operating working capital equal to 10% of sales. It would take 1 year to buy the required equipment and set up operations, and the project would have a life of 5 years. If the project is undertaken, it must be continued for the entire 5 years.

The firm believes it could sell 6,000 units per year. The drills would sell for $250 per unit, and DrillOng believes that variable costs would amount to $180 per unit. The companys fixed costs would be $110,000 at Year 1 and would increase with inflation. After the first year, the sales price and variable costs will also increase at the inflation rate of 3%.

The equipment would be depreciated over a 5-year period, using the straight-line method. The salvage value of the equipment at the end of the projects 5-year life is $50,000. The company however estimated the machine can be sold as scrap for RM60,000. The corporate tax rate is 25%.

The projects returns are expected to be highly correlated with returns on the firms other assets. The cost of capital is 12%.

  1. Conduct a scenario analysis. Assume that the best-case condition is with the sales price increase by 10%, number of units sold 6,200 units, variable costs per unit and fixed cost increase 5% from the base-case value. The worst-case condition, with increase in the variable and fixed cost by 25% and with no change in the unit sales and unit price from the base value. The best-case condition, worst-case condition, and the base case are assumed to have an equal probability. What would be the projects coefficient of variation NPV?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Local Public Finance

Authors: René Geissler, Gerhard Hammerschmid, Christian Raffer

1st Edition

3030674681, 978-3030674687

More Books

Students also viewed these Finance questions