Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

NPV Profile Discount Rate ( % ) BRIGHT RAY Limited is an automation firm that invests much in research and development ( R&D ) before

NPV Profile
Discount Rate (%)
BRIGHT RAY Limited is an automation firm that invests much in research and development (R&D) before releasing a new equipment, which is typically designed to save employees time. BRIGHT RAY Limited serves the manufacturing industry as a supplier. BRIGHT RAY recently spent $280,000 developing BR1, an autonomous food preparation system. However, a few random test runs revealed that BR1 is not yet market-ready because it has difficulty distinguishing residue from fine output. Such uncommon failures need a long restart time. During the reset phase, companies that purchase and install BR1 may lose a significant amount of output. Nonetheless, given the level of rivalry, BRIGHT RAY officials want to release the BR1 machine before any new competitors do.
A local importer will sell BRIGHT RAY the equipment required to construct the plant that will manufacture machine BR1 for $6,250,000. BRIGHT RAY Limited must pay an additional $750,000 in installation fees. The plant's useful life would be five years, and it would be depreciated at a straight-line rate of 20% each year.
According to the marketing director at BRIGHT RAY Limited, 300 units of the BR1 machine can be sold in the first year, with sales dropping by 25 units each year for the remainder of the project. The projected price per unit is $50,000. As long as at least 200 units are produced each year, the variable cost of production is predicted to equal 60% of sales revenue. The fixed costs of operating this factory would be $1,800,000 per year.
BR1 will most likely require an initial inventory of $260,000. Also, as sales increase, $210,000 will be locked up in debtors accounts, but this will be substantially offset by a $70,000 increase in accounts payable. The project management intends to maintain the same level of net working capital (NWC) throughout the project's duration. This indicates that there will be no fresh investments in NWC during the
project's lifetime. After four years, NWC will be recovered. The new plant will be located in a manufacturing space that is currently utilised for storage. This yields a net income of $10,000 a month, however it will be discontinued due to the new plant. Additionally, when BRIGHT RAY sells machine BR1, its annual income from automation consulting fees will decrease by $30,000. At the conclusion of this project, the plant would be transferred (sold) to another project for a price of $700,000.
If a firm purchases BRIGHT RAY's BR1 machine, it will eventually replace many of its unskilled and semi-skilled employees with a few skilled ones in order to increase production efficiency. An Association
of Labour Unions is opposed to firms installing BR1 because it will result in many people losing their employment since they will be unable to do their duties. In response to the Association's worries,
BRIGHT RAY's management has identified another project that would manufacture semi-automatic machines BR2 and will require both semi-skilled and skilled people. The initial total investment for this
BR2 project would exceed the cost of BR1 project by 10%, and the predicted future cash flows (after all adjustments) for this five-year project would be as follows:
Year-1: $2,100,000; Year-2: $2,600,000; Year-3: $3,500,000; Year-4: $3,300,000; Year-5: $2,750,000
The company's weighted average cost of capital (WACC), which has fluctuated between 14% and 18% in recent years, is utilised to determine the required rate of return. Management has chosen to utilise both rates in evaluating this project. Companies are subject to a tax rate of 30%. Based on projections, the estimated payback period for BRIGHT RAY is 3.5 years.
Prior to reaching a final decision during the upcoming meeting, the Managing Director (MD) of BRIGHT RAY Limited is seeking a comprehensive explanation of the key components of the BR1 project. The MD is requesting a formal report that includes a thorough analysis of cash flows and clear explanations of the results, utilising appropriate capital budgeting procedures commonly employed for project evaluation.
In addition, the MD is interested in examining the specific details of the comparison between the BR1 and BR2 projects. This analysis will involve evaluating the results of appropriate capital budgeting methods, considering both a 14% and 18% required rate, determining the crossover rate, and taking into account all relevant factors that can contribute to making a final decision. These findings will be presented in a separate section of the report.
Follow the picture of the template given to complete the cash flow tabel and write out all the formula for the calculation in excel. Thank you very much.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Finance The Markets And Financial Management Of Multinational Business

Authors: Maurice D. Levi

3rd Edition

0070376875, 978-0070376878

More Books

Students also viewed these Finance questions