Question 1 You work in the finance department of Elite plc a company that manufactures office furniture. The Finance Director has called you in to discuss plans the company has invest in a new project that will enable the company to produce modular cubicles. It was originally anticipated that the project would generate net cash flows of HK$800,000 (year zero values) per annum however because of recent changes in the market the sales director thinks that there is a 50% chance that the net cash flows will only be $600,000 (year zero values) per annum. You have been provided with the following additional information about the project; The machinery required will cost HK$1.4m. The machinery will have a useful life of three years and a residual value of nil. The company will depreciate the machinery on a straight-line basis over its useful life.- Market research has been carried out at a cost of HK$200,000. The invoice for this has not been paid. Working capital of HK$500,000 (current price values) will be required at the start of the project and will be released in the final year." General overheads of $100,000 per annum will be allocated to this project.- Inflation of 3% will affect the net cash flows including the working capital requirement in each of the coming years. Corporation tax is charged at 20% and paid a year after profits are earned. The machinery will be eligible for capital allowances at 18% per annum on the reducing balance method. These will start being claimed in year 1.4 The money rate of capital is 10% When net cash flows were forecast at $800,000 per annum the project had a positive Net Present Value of HK$ 208,443.- Required: a) Calculate the Net Present Value of the project using the revised cash flow estimates of $600,000 per annum. (20 marks) b) Calculate the Expected Net Present Value and the standard deviation of the project given the comments of the sales director. (8 marks) 4 c) Using the z statistic calculate the probability of the project having a positive Net Present Value. (4 marks) d) Evaluate the methods of investment appraisal applied to the project and recommend whether Elite should go ahead with the project. + (8 marks) TOTAL (40 marks) Question 1 You work in the finance department of Elite plc a company that manufactures office furniture. The Finance Director has called you in to discuss plans the company has invest in a new project that will enable the company to produce modular cubicles. It was originally anticipated that the project would generate net cash flows of HK$800,000 (year zero values) per annum however because of recent changes in the market the sales director thinks that there is a 50% chance that the net cash flows will only be $600,000 (year zero values) per annum. You have been provided with the following additional information about the project; The machinery required will cost HK$1.4m. The machinery will have a useful life of three years and a residual value of nil. The company will depreciate the machinery on a straight-line basis over its useful life.- Market research has been carried out at a cost of HK$200,000. The invoice for this has not been paid. Working capital of HK$500,000 (current price values) will be required at the start of the project and will be released in the final year." General overheads of $100,000 per annum will be allocated to this project.- Inflation of 3% will affect the net cash flows including the working capital requirement in each of the coming years. Corporation tax is charged at 20% and paid a year after profits are earned. The machinery will be eligible for capital allowances at 18% per annum on the reducing balance method. These will start being claimed in year 1.4 The money rate of capital is 10% When net cash flows were forecast at $800,000 per annum the project had a positive Net Present Value of HK$ 208,443.- Required: a) Calculate the Net Present Value of the project using the revised cash flow estimates of $600,000 per annum. (20 marks) b) Calculate the Expected Net Present Value and the standard deviation of the project given the comments of the sales director. (8 marks) 4 c) Using the z statistic calculate the probability of the project having a positive Net Present Value. (4 marks) d) Evaluate the methods of investment appraisal applied to the project and recommend whether Elite should go ahead with the project. + (8 marks) TOTAL (40 marks)