INVESTMENT APPRAISAL (8 marks) On 1 January 2019, Della Ltd is considering investing in a new equipment that would cost $540,000, payable immediately. The equipment will be used to produce a new product, and Della Ltd expects to use the equipment for the next 3 years. At the end of the 3 years, the equipment will have a residual value of $90,000. The estimated sales (in units) for the new product produced using this equipment are as follows: 2019 2020 2021 Sales (units) 21,000 43,000 27,000 It is estimated that the new product will be sold for $20 per unit and that the direct costs in producing the product will total $5 per unit. Della Ltd calculates depreciation on a straight-line basis. The company's cost of capital (i.e., required rate of return) is 5%. The present values of $1 (i.e., discount factors) are: Interest (discount) rate Periods 2 0.9524 0.9070 1 3 5% 0.8638 IMPORTANT: In answering the questions below, please don't include the dollar sign ($) or any thousands separator - i.e., $12,000 should be written as 12000 For ARR, make sure you express it as a percentage with 2 decimal places (e.g. 14.55) - please don't include the % (percentage) sign. Car Min man ini danimala 1991 IMPORTANT: In answering the questions below, please don't include the dollar sign ($) or any thousands separator - i.e., $12,000 should be written as 12000 For ARR, make sure you express it as a percentage with 2 decimal places (e.g. 14.55) - please don't include the % (percentage) sign. For NPV, make sure you express it in 2 decimal places (e.g. 123456.70). When calculating the NPV, please use the discount factors provided in the question. If any of the net cash flows, net profits/losses or the NPV is negative, please include the - (minus) sign in front of the amount and don't put it in parentheses. REQUIRED: (a) Calculate the annual net cash flows (i.e., cash inflows minus cash outflows) expected to be generated by this project after the initial investment. (2.25 marks) Net cash flows 2019: Net cash flows 2020: Net cash flows 2021: (b) Calculate the annual net profit/loss expected to be generated by this project after the initial investment. (2.25 marks) Net profit/loss 2019: Net profit/loss 2020: (b) Calculate the annual net profit/loss expected to be generated by this project after the initial investment (2.25 marks) Net profit/loss 2019: Net profit/loss 2020 Net profit/loss 2021: (c) Calculate the annual rate of return (ARR). Calculate each component of ARR. (2 marks) Average net profit/loss Average investment ARR (d) Assuming that cash from sales and for the costs of production for each year are received and paid, respectively, at the end of each year in which they arise, calculate the net present value of this project. (1.5 marks) NPV
