Faculty of Business and Economies Finance and Banking Department Finn 3300 Fall semester 2021/2022 4 Capital Budgeting Case You are a senior financial analyst at PALTEL and you are requested to analyse the following project, where all of the dollar figures are in thousands. In year 0, the project requires an $11,350 investment in plant and equipment which is depreciated using the straight-line method over seven years and has a salvage value of $1,400 in year 7. The project is forecasted to generate sales of 2,000 units in year 1, 3,350 units in year 2, 4,700 units in year 3, 6,050 units in year 4 rising to 7,400 units in year 5, 10,200 units in year 6 and declining to 1,800 units in year 7. Sales revenue per unit is forecasted to be $9.70. The variable unit cost for Direct Labour, Materials, Selling Expenses, and overhead are forecasted to be $3.50, $2.00, $1.20, and $0.70, respectively. Cash fixed costs for Lease Payment, Property Taxes, Administration, Advertising, and other cash fixed costs are forecasted to be $2,800, $580, $450, $930, and $520, respectively, the project will require working capital in the amount of $0.87 in year 0 for every unit of next year's forecasted sales. You expect to sell the machines at the end of the project life for a gain of 600 dollars. The tax rate is constant at 35% and the cost of capital is forecasted to be 11.0% You are required to estimate the free cash flows for this project for each year and to calculate the project's NPV. Faculty of Business and Economies Finance and Banking Department Finn 3300 Fall semester 2021/2022 4 Capital Budgeting Case You are a senior financial analyst at PALTEL and you are requested to analyse the following project, where all of the dollar figures are in thousands. In year 0, the project requires an $11,350 investment in plant and equipment which is depreciated using the straight-line method over seven years and has a salvage value of $1,400 in year 7. The project is forecasted to generate sales of 2,000 units in year 1, 3,350 units in year 2, 4,700 units in year 3, 6,050 units in year 4 rising to 7,400 units in year 5, 10,200 units in year 6 and declining to 1,800 units in year 7. Sales revenue per unit is forecasted to be $9.70. The variable unit cost for Direct Labour, Materials, Selling Expenses, and overhead are forecasted to be $3.50, $2.00, $1.20, and $0.70, respectively. Cash fixed costs for Lease Payment, Property Taxes, Administration, Advertising, and other cash fixed costs are forecasted to be $2,800, $580, $450, $930, and $520, respectively, the project will require working capital in the amount of $0.87 in year 0 for every unit of next year's forecasted sales. You expect to sell the machines at the end of the project life for a gain of 600 dollars. The tax rate is constant at 35% and the cost of capital is forecasted to be 11.0% You are required to estimate the free cash flows for this project for each year and to calculate the project's NPV
