PRINCIPLE OF FINANCE (Part 1)

[CALCULATE IN EXCEL]

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Skinnyfish Limited (SFG) is considering embarking on a new project to introduce a new product. The project is expected to last five years.

SFG can manufacture the new product for $140 each in variable costs. Annual fixed costs excluding depreciation will be $0.5 million. The necessary equipment can be purchased for $9.9 million with an additional shipping and installation cost of $0.1 million and will be depreciated over 10 years using the prime cost method. It is believed that the value of the equipment in five years will be $3 million. Networking capital (NWC) investment will be 20 percent of sales for the first four years of the project. All NWC will be liquidated at the termination of the project.

The estimated sales volume is 50 000 (Y1), 60 000 (Y2), 70 000 (Y3), 40 000 (Y4), and 30 000 (Y5) respectively over Year 1, Year 2, Year 3, Year 4, and Year 5. The sales price per unit is $225. SFG has a 30 percent corporate tax rate. The expected return from the market where SFGs stocks are listed for trading is 11 percent per annum, the relevant risk-free return is 1 percent per annum and the annual beta for the company is 1.4.

The answers need to be structured like this:

Covers cash flow projections, capital budgeting techniques, investment decision, and risk analysis.

3.1. Cash flow projections: Covers initial investment, operating cash flows, terminal cash flow, and free cash flows.

3.2. Capital budgeting techniques: Presents net present value and internal rate of return.

3.3. Investment decision: Makes investment decision.

3.4. Risk analysis: Summarises the results of sensitivity and scenario analyses.

4. Conclusions: Concludes by comparing the risk and reward of the project.

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Please Calculate in EXCEL and Explain:

1) Initial investment (5 Marks)

2) Depreciation (5 Marks)

3) Tax (5 Marks)

4) Operating cash flows (5 Marks)

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Please show solutions, formulas, and explanations as well. I will give you a great rating if answered.