PURPOSE

THE CASE IS AN OPPORTUNITY TO DO A CASH FLOW ANALYSIS. THE USE OF VARIABLE DISCOUNT

RATES BASED ON PROJECT RISK. THE CASE GIVES INSIGHT INTO HOW SOME CORPORATIONS

ADJUST FOR RISK EXPOSURE. ALSO, THE USE OF AN APPROPRIATE TIME HORIZON FOR ANALYSIS

IS HIGHLIGHTED.

CASE STUDY $-$ ATO ZINC.

A TO Z INC. IS CONSIDERING ADDING A NEW PRODUCT LINE TO THEIR OFFERINGS.

IN $20$XX$,$ SALES WERE ONLY $$500,000.$ THEY HAVE SINCE GREW DURING THE $20-$YEAR PERIOD TO

ALMOST $$20$ MILLION BY $20$XX$.$ HOWEVER, SALES HAVE NOT INCREASED IN THE MOST RECENT $3-$

YEAR PERIOD AND THIS YEAR PROFIT IS EXPECTED TO BE ABOUT $9\%$ LESS THAN THE PREVIOUS

PROFIT. TO ADDRESS THE ISSUE OF DECLINING PROFITABILITY, THE DIRECTOR WANTS TO EXPAND

PRODUCT OFFERINGS BY INTRODUCING A NEW PRODUCT. THE DIRECTOR IS HOPING TO

CONTINUE THE PRODUCT ON A PERMANENT BASIS BUT HAS DECIDED TO ANALYZE THE

PROFITABILITY FOR SIX YEARS ONLY.

THE EXPECTED SALES FOR THE FIRST YEAR; $($TABLE $1)($Please see the attached$)$

DIRECTOR EXPECTED THE GROWTH IN SALES AT $20\%$ AND $10\%$ FOR INITIAL THREE YEARS AND TWO

YEARS AFTER THAT RESPECTIVELY ON YEAR$-$ON$-$YEAR BASIS. THOUGH THE WORKING CAPITAL NEED

FOR THE PROJECT IS EXPECTED TO BE $$200,000.$ THE INITIAL COST FOR THE PROJECT WOULD BE $2\mathrm{.}8$

MILLIONS AND SALVAGE VALUE AT $$100,000.$ THE EARNINGS BEFORE THE TAX SHOULD BE AT $30\%,$

WHILE CCA RATE AT $20\%$ DISCOUNT RATE FOLLOWS THE COEFFICIENT OF VARIANCE AS FOLLOWS:

$($TABLE $2)($Please see the attached$)$

REQUIRED:

SPECIFICALLY, CALCULATE THE EXPECTED VALUE FOR SALES, THE STANDARD DEVIATION, AND

COEFFICIENT OF VARIATION. THEN, USE THE APPROPRIATE DISCOUNT RATE FROM TABLE $2$ TO

PERFORM A NET PRESENT VALUE $($NPV$)$ ANALYSIS $("$WITH $112$ RATE RULE & ACCELERATED RULE$)$

BASED ON YOUR ANALYSIS, MAKE A RECOMMENDATION ON WHETHER THE PROJECT IS

FEASIBLE AND SHOULD BE CONSIDERED. LASTLY, COMMENT ON WHETHER A $6-$YEAR TIME

HORIZON IS APPROPRIATE.