Question
Gama group, a known chemical manufacturer is considering starting a new line of fertilizers. Claudia Grace is hired as a consultant for this project. She
Gama group, a known chemical manufacturer is considering starting a new line of fertilizers. Claudia Grace is hired as a consultant for this project. She studies the market and finds out that Gama group should be able to sell approximately 500 tonnes of fertilizer. However, since the farmers are more inclined towards natural manures, which are usually available for a very low cost; Gama group cannot charge a very high price for its product. Claudia estimates that the company should be able to sell at $200/tonne. The cost estimate for manufacturing the fertilizer per tonne is as follows: the raw material input cost along with direct labour is around $ 50 per tonne. The rent paid for the factory is $ 12500 and the salary given to support staff is $ 4000 for the period. The setting up cost, cost of hiring the machinery, etc. along with other initial costs is estimated by Claudia as $ 30000. The project is estimated to have a life of 4 years, and Gama ltd. has a cost of capital of 12%. A. To be very certain of her predictions, she wants to examine the sensitivity of the projects NPV to the following assumptions used. 1) Rent and Salaries 2) Initial investment 3) Sales (units) 4) Cost of input (raw material) and labour 5) Sales (price) (15 marks) B. To which assumptions is the projects NPV most sensitive? Give suggestions to improve the sensitivity. (5 marks)
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