Question
hello, i need help with my finance homework Another one of your responsibilities as CFO is to determine the suitability of new and current products.
hello, i need help with my finance homework
Another one of your responsibilities as CFO is to determine the suitability of new and current products. Your CEO has asked you to evaluate Android01. That task will require you to combine data from your production analysis from Project 2 with data from a consultant's study that was done last year. Information provided by the consultant is as follows:
- initial investment: $120 million composed of $50 million for the plant and $70 million net working capital (NWC)
- yearly expenses from year 1 to year 3: $30 million
- yearly revenues from year 1 to year 3: $0
- yearly expenses from year 4 to year 10: $55 million
- yearly expected revenues from year 4 to year 10: $95 million
- yearly expenses from year 11 to year 15: $60 million
- yearly expected revenues from year 11 to year 15: $105 million
- Revenues will vary between $80 million (minimum) and $105 million (maximum) for years 4 to 10, and between $90 million (minimum) and $110 million (maximum) for years 11 to 15.
This concludes the information provided by the consultant.
You also have the following information:
- The asset beta of the project is 1.5. The expected return to the market is 8 percent, and the market risk premium is 5 percent.
- Assume that both expenses and revenues for a year occur at the end of the year. NWC pays the bills during the year, but has to be replenished at the end of the year.
- Android01 is expected to cannibalize the sales of Processor01 while also reducing the variable costs for the production of Processor01. From years 4 to 10, revenues are expected to fall by $5M, whereas variable costs will go down by $1 million. Processor01 is to be phased out at the end of the 10th year.
- At the end of the 15th year, the plant will be scrapped for a salvage value of $10 million. NWC will be recovered.
Question 10:Calculate the expected cash flows from the Android01 project based on the information provided.
Question 11:Calculate the NPV for a required rate of return of 6.5 percent. Also calculate the IRR and the Payback Period.
Be sure to show your calculations in Excel and make recommendations for the benefit of the company.
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