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Perth Pharmaceuticals Ltd has invested 300,000 to date in developing a new type of insect repellent. The repellent is now ready for production and sale

Perth Pharmaceuticals Ltd has invested 300,000 to date in developing a new type of insect repellent. The repellent is now ready for production and sale and the marketing director estimates that the product will sell 150,000 bottles per annum over the next five years. The selling price of the insect repellent will be 5.00 per bottle and the variable costs are estimated to be 3.00 per bottle. Fixed costs (excluding depreciation) are expected to be 160,000 per annum. In order to produce the repellent, machinery and equipment costing 520,000 will have to be purchased immediately. The estimated residual value of this machinery and equipment in five years' time is 100,000. The company has a cost of capital of 12 per cent. Ignore taxation.

Required:

(a)Calculate the net present value of the product.

(8)

(b)Undertake sensitivity analysis to show by how much the following factors would have to change before the product ceased to be worthwhile:

(i)the discount rate (try rates of 12% and 18%);

(ii)the initial outlay on machinery and equipment;

(iii)the net operating cashflows;

(iv)the residual value of the machinery and equipment.

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