Q1:

The financial advisor to EEW Company is evaluating whether to keep company cars for 3, 4 or 5 years. The following information has been gathered:-

A car costs $60,000 and depreciation is 20% pa straight-line.

Cash expenses are $15,000 per year for the first 2 years, $20,000 in year 3, $30,000 in year 4 and $40,000 in year 5.

The salvage value is expected to be $30,000 after 3 years, $25,000 after 4 years and $15,000 after 5 years.

The after-tax required rate of return is 8% pa and the tax rate is 30%.

Required

Prepare an analysis to decide whether company cars should be kept for 3, 4, or 5 years before being replaced with new ones. (calculations should be done in Excel)

Q2:

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

The project has a useful life of 10 years.

Land costs $12m and is estimated to have a resale value of $16m at the completion of the project.

Buildings cost $6m, with allowable depreciation of 6% pa reducing balance and a salvage value of $2m.

Equipment costs $5m, with allowable depreciation of 30% pa reducing balance and a salvage value of $1m. An investment allowance of 15% of the equipment cost is available.

Working capital of $2m is required at the start of the project but is anticipated to be recovered at the end of the project's life.

Revenues are expected to be $10m for the first 5 years and $8m for the next 5 years.

Cash expenses are estimated at $5m in year one and rise at 5% pa.

The new product will be charged $500,000 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 $150,000 has been spent on a feasibility study for the new project.

The project is to be partially financed with a loan of $15m to be repaid annually with equal instalments at a rate of 4% 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 12% 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, the resale value of the land and to the required rate of return. Explain your results.

(Calculations must be done in Excel)