Project 1 Calculations must be done in Excel You must create your own spreadsheet . This question should be done using Method 1 as outlined in lecture 6 (i.e. Tax Effects, then Cash Flows then NPV).

ABC corporation projects their future unit sales for a new headphone. The projected unit sales are as below.

	1	2	3	4	5
Unit sales	70000	80000	120000	100000	90000

To produce the headphones, the initial net working capital of $2,000,000 is required and additional net working capital is also required each year, which is 20% of the projected sales increase for the following year. The net working capital will be recovered at the end of a project. In addition, the initial installation cost of the machine for production is $20,000,000. The machine will be depreciated for tax purposes using straight-line depreciation with the useful life of 8 years. Also, costs and unit price are as below.

Fixed cost	$3,250,000 per year
Variable cost	$280 per unit
Price	$425 per unit

In five years, the machine can be sold for about 20% of its acquisition cost. The tax rate is 30% and the required rate of return is 18%.

Required

1. What is the NPV of the project? Explain and defend your processes, answer, and calculations clearly.
2. Assuming that the project can be repeated indefinitely, what is the NPV of the project? Suppose that there is another project with the NPV of $4 million and the NPV of $6 million. Which project would you choose, assuming that two projects are mutually exclusive and can be repeated indefinitely? Why? Explain and defend your processes, answer, and calculations clearly.

Project 2 Calculations must be done in Excel You must create your own spreadsheet . This question should be done using Method 1 as outlined in lecture 6 (i.e. Tax Effects, then Cash Flows then NPV).

As the financial advisor to All Star Manufacturing you are evaluating the following new investment in a manufacturing project: -

• The project has a useful life of 8 years.
• Land costs $12m and is estimated to have a resale value of $25m at the completion of the project.
• Buildings cost $12m, with allowable depreciation of 8% pa reducing balance and a salvage value of $10m.
• Equipment costs $5m, with allowable depreciation of 15% pa reducing balance and a salvage value of $1m. An investment allowance of 20% of the equipment cost is available.
• Revenues are expected to be $14m in year one and rise at 5% pa due to growth.
• Cash variable costs are estimated at 35% of revenue.
• Cash fixed costs are estimated at $3.5m pa.
• The firm has spent $2m on research and development for the project.
• Managerial salaries of $900,000 will be allocated to the project, but these managerial positions will be unaffected by the acceptance of the project.
• An amount of $200,000 has been spent on a feasibility study for the new project.
• The project is to be partially financed with a loan of $14m to be repaid annually with equal instalments at a rate of 3% pa over 8 years.
• Except for initial outlays, assume cash flows occur at the end of each year.
• The tax rate is 30% and is payable in the year in which profit is earned.
• The after-tax required return for the project is 12% pa.

Required

1. Calculate the NPV. Is the project acceptable? Why or why not? Explain and defend your processes, answer, and calculations clearly.
2. Conduct a sensitivity analysis showing how sensitive the project NPV is to:
   1. revenue growth of 0% and 10%
   2. fixed cost p.a. increase by $1m and decrease by $1m
   3. the required rate of return increase by 2% and decrease by 2%.

Run all above sensitivities separately on a stand-alone basis.

Explain and defend your processes, answer, and calculations clearly.

Show the NPV change compared to the original calculations.