Question
Envair Corp. is considering a project which requires an investment of RM12 million in machinery. This machinery will be depreciated using straight-line over five years
Envair Corp. is considering a project which requires an investment of RM12 million in machinery. This machinery will be depreciated using straight-line over five years period and the salvage value is estimated to be zero by the end of this machine useful life. The project sales forecast for the next five years is as follows:
Year | 1 | 2 | 3 | 4 | 5 |
Sales (units) | 70,000 | 80,000 | 100,000 | 90,000 | 60,000 |
The selling price per unit is RM160 and the variable cost per unit is RM100. Total fixed costs for this project (relevant) are RM500,000 per year. The project requires an increase in net working capital of RM350,000 in the initial year and will be fully recovered at the end of the projects life. The firms required return on investment of 20%.
However, the company recognizes that some of these estimates are subjected to economic condition. Given below is the estimated figure under different situation:
| Sales volume | Selling price | Variable costs |
Boom | + 10% | + 5% | - 8% |
Depression | - 10% | - 5% | +8% |
Required:
a. Determine the net present values of this project under best case, base case and worst
case scenario. (17 Marks)
b. Recommend whether the company should invest in this project based on your result in
part (a) (3 Marks)
P/S: PLEASE SHOW FULL CALCULATION .
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