MINI-CASE-L99D11.7 LSD5

Company is working on eco-friendly four-stroke motors for boats for the last few years. The company is now planning to start the production of its latest model of the motor. For creating market demand for this new motor, the management of the company has spent $33,000 for conducting multiple workshops with boat manufacturers. The management has decided to go for production after considering the success of the campaign. Collected information has revealed that the cost of the plant would be $5.7 million. For making the plant operational, an additional cost of $0.44 million would be incurred. For tax purposes, the plant would be depreciated at 15% per year. It is expected that the salvage value of the plant after its operational life of six years would be $1.3 million. Starting production with this plant will require more buying of raw materials and selling of finished goods on credit. As a result, there would be incremental accounts receivable of $71,000 and accounts payable of $41,000, in addition, an increase in inventories of $126,000. Due to incremental cash flows, the company can reduce its debt capital and its annual interest expense will decrease from $18,000 to $13,000. The sale of existing motor parts produced by the company will go down and the existing regular net earnings from parts of $99,000 per year will reduce by 50%. Expected annual sales of the new motor would be $5 million in the first year and that will grow by 9% each year until the 6th year when the production of this new motor will be discarded on the arrival of an advanced model. 49% of sales revenue of the new motor is estimated to be the cost of production. The cost of capital is 11.7 percent and the applicable tax rate is 31%. It is also expected that the introduction of this new motor will increase annual sales of the companys toolbox by $68,000 (and that requires 68% costs on sale).

Requirement-A. Prepare a Cash Flow Table for the project (show all digits of the figures, do not display figures in million or thousand). Calculate NPV, IRR, PVI, and Discounted Payback Period for the project. Show your workings. Do not use any images. <4 marks>