Question
Project 2 Calculations must be done in Excel - You must create your own spreadsheet do not copy and paste someone else's. Grant Thomas, the
Project 2 Calculations must be done in Excel - You must create your own spreadsheet do not copy and paste someone else's.
Grant Thomas, the financial advisor to Innovative Manufacturing is evaluating the following new investment in a manufacturing project:-
The project has a useful life of 10 years.
Land costs $5m and is estimated to have a resale value of $7m at the completion of the project.
Buildings cost $4m, with allowable depreciation of 5% pa straight-line and a salvage value of $0.8m.
Equipment costs $3m, with allowable depreciation of 20% pa straight-line and a salvage value of $0.4m. An investment allowance of 20% of the equipment cost is available.
Revenues are expected to be $5m in year one and rise at 10% pa.
Cash expenses are estimated at $2m in year one and rise at 5% pa.
The new product will be charged $300,000 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage 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 $6m to be repaid annually with equal instalments at a rate of 5% pa over 10 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 10% pa.
Required
(a)Calculate the NPV.Is the project acceptable? Why or why not?
(b)Conduct a sensitivity analysis showing how sensitive the project is to revenues, cash expenses and to the cost of capital. Explain your results.
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