Need Correct answer

1. Consider the following financial information for a new productive sector investment project:

• Investment Costs - The total project investment cost is $230,000. This is made up of Land & Buildings $50,000, Machinery & Equipment $130,000 Vehicles $40,000 and Furniture and Fittings $10,000. You should assume that land clearance, construction, installation of machinery and commissioning of plant takes 12 months. The machinery and equipment has a useful life of 10 years with a residual value of $6,250. You should calculate depreciation of the other assets using appropriate rates and methods of your choice. You must clearly explain the methodology employed and justify any assumptions that you make.

• Production It is estimated that the plant will produce 61,000 units in the first year of production and will grow at 10% per year for the two subsequent years. Following this there will be no subsequent growth in production.

• Sales The sales price is $2.6 per unit.

• Operating Costs - the project will operate and produce goods for 8 years. Direct labour costs are approximately 40% of the unit selling price and direct materials are 20% of the unit selling price.

• Fixed Costs - are $6,000 for all operating years.

• Physical Working Capital Costs - should be based on the following assumptions:

• Materials 1.5 months supply kept in stock
• Final goods - 1 months stock kept on average

• Financial Working Capital - should be estimated on the following assumptions:

• Accounts receivable - 2.5 months credit allowed before payment due
• Accounts payable - 1 months credit given on materials purchased

• Equity Capital - The initial assumption is that $110,000 owners equity is available to contribute to the financing of the project.

Using this information you should answer the following questions to determine whether or not this project acceptable:

(a) Prepare an annual statement of costs and benefits (pre-financing) and calculate the NPV and IRR to total capital for this investment. Interpret the results with reference to the relevant theoretical literature and determine if the project is acceptable or not (Assume a discount rate of 10%). (30% of marks)

(b) Construct a cashflow for financial planning and use it to prepare an adequate financing plan for the project. The Bank has indicated that loans for this type of project would be available at 12% per annum. You should explain each aspect and justify all assumptions made in drawing up the financing plan. You should also clearly set out and explain your loan scheduling method and calculations. Critically assess the relative merits of other alternative sources of liquidity and project finance which might be available to you as a project analyst when constructing a financial plan of this nature? 30% Marks

(c) Calculate the Trading and Profit and Loss Account (Income Statement) for the project. Profits are taxable at 40% of annual profit and no tax holiday is available, but earlier losses can be offset against subsequent annual profits where applicable. Using appropriate ratios determine whether the level of profit is acceptable? What additional information you would need to make a more informed and critical assessment of the profitability of the project. (30% of marks)

(d) Calculate the Internal Rate of Return and Net Present Value to Owners Equity. Critically assess and interpret the results from the owners point of view. (10% of marks)