Question 1:

MAZ Computer Ltd. is considering producing a new handheld, wireless internet device. The Management of MAZ Computer Ltd. spent JOD 3,000,000 last year on tests and marketing research and has developed a set of forecasts. The total cash costs consisting of cost of goods sold and selling and administrative costs of the device will be JOD 30 per a device, and the company will sell it for JOD 100 per a device.

The company can produce 50,000 device each year for the next five years, and they expect to sell them all each year. The company would have to construct a manufacturing plant, which would cost JOD 10,000,000 to be constructed immediately and be depreciable over 10 years using straight-line depreciation method. The company would have to invest JOD 2,000,000 in inventory beginning today, and this amount would not change over the life of the project. In 5 years, the company will quit, dispose of the plant for JOD 1,000,000, and recover working capital. The tax rate is 40%; the company requires a 15% return on investment.

The Chief Executive Officer of MAZ Computer Ltd. could not determine if the project is worthwhile, so he asked you (as a Financial Director) to:

1. Determine the yearly income statement for MAZ Computer Ltd. during the project life. (4 Marks)

2. Determine the operating cash flow for MAZ Computer Ltd. During the project life. (4 Marks)

3. Using NPV, would you recommend investing in the project. (4 Marks)