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BEN Electronics is considering buying a new machine and using it to produce a new type of silicon chip that the company's engineers have designed. The financial estimates supplied by the firm's technical and marketing staff are as follows. One number is given for figures that are certain. Where there is risk, the analysts have been asked for an expected value and a feasible range of values. The probability that the final outcome will be below the lower limit, or that it will be above the higher limit is 5%. The new machine will cost 600,000 (certain), and it has a design capacity of one million chips a year. The proportion of these chips that will be of saleable quality is estimated at 80% (range 68% to 92%). The fixed costs of operation will be 100,000 per year (certain) and the variable costs per unit sold will be 10p per chip (certain). Initially chips will be sold at what the market will bear. This is expected to be 50p (range 45p to 55p). However, competitors will have learned how to make the chips at the end of the 4th year (range 3 yrs to 5 yrs) and when this happens the price will fall to 30p. BENs cost of capital for this project is 15% p.a. The machine, and the chips it produces, will become obsolete after 8 years of production. (i) (ii) Calculate the expected value for the NPV. Perform a sensitivity analysis on this project. Which type of risk (% of saleable chips, number of years before competitive entry and initial price) has the biggest influence on the net present value of the project? How might the business use this information? (iii) NB The variable costs are only incurred on chips that are of saleable quality. (1) Calculate the NPV and IRR of the following three investment projects. The required rate of return is 12% p.a. (Brackets indicate a negative figure). Time 0 1 2 3 4. 5 Incremental cash flow (s) A B (20,000) (10,000) (20,000) 13,333 3,000 5,000 13,333 3,500 7,000 13,333 4,000 7,500 12,000 4,000 7,500 (33,333) 4,000 7,500 (ii) (iii) (iv) Which project(s) should be accepted if the company is free to accept any or all? Which projects should be accepted if B and C are mutually exclusive? A further project D is available which has exactly the same cash flows as B. If the company has an absolute limit of 20,000 available for investment at time 0, which projects should it accept? BEN Electronics is considering buying a new machine and using it to produce a new type of silicon chip that the company's engineers have designed. The financial estimates supplied by the firm's technical and marketing staff are as follows. One number is given for figures that are certain. Where there is risk, the analysts have been asked for an expected value and a feasible range of values. The probability that the final outcome will be below the lower limit, or that it will be above the higher limit is 5%. The new machine will cost 600,000 (certain), and it has a design capacity of one million chips a year. The proportion of these chips that will be of saleable quality is estimated at 80% (range 68% to 92%). The fixed costs of operation will be 100,000 per year (certain) and the variable costs per unit sold will be 10p per chip (certain). Initially chips will be sold at what the market will bear. This is expected to be 50p (range 45p to 55p). However, competitors will have learned how to make the chips at the end of the 4th year (range 3 yrs to 5 yrs) and when this happens the price will fall to 30p. BENs cost of capital for this project is 15% p.a. The machine, and the chips it produces, will become obsolete after 8 years of production. (i) (ii) Calculate the expected value for the NPV. Perform a sensitivity analysis on this project. Which type of risk (% of saleable chips, number of years before competitive entry and initial price) has the biggest influence on the net present value of the project? How might the business use this information? (iii) NB The variable costs are only incurred on chips that are of saleable quality. (1) Calculate the NPV and IRR of the following three investment projects. The required rate of return is 12% p.a. (Brackets indicate a negative figure). Time 0 1 2 3 4. 5 Incremental cash flow (s) A B (20,000) (10,000) (20,000) 13,333 3,000 5,000 13,333 3,500 7,000 13,333 4,000 7,500 12,000 4,000 7,500 (33,333) 4,000 7,500 (ii) (iii) (iv) Which project(s) should be accepted if the company is free to accept any or all? Which projects should be accepted if B and C are mutually exclusive? A further project D is available which has exactly the same cash flows as B. If the company has an absolute limit of 20,000 available for investment at time 0, which projects should it accept