Question 2 Longshot Company has the opportunity to manufacture and sell a novelty third brake light for automobiles. Producing the light requires an Initial investment of $500,000 in manufacturing equipment, which depreciates over a five year time period toward a $50,000 salvage value, plus an investment of $20,000 in net operating working capital. The discount rate used to analyze the project cash flows is 10 per cent (N. This rate is the opportunity cost of investing in the proposed investment and should reflect the risk of the investment. Other important information describing the investment opportunity is summarized as follows: Inital cost of equipment 1$500,000 Project and equipment life 5 years Salvage value of equipment $50,000 Working capital requirement $20,000 Depreciation method Straight Line Depreciation expense $90,000) Discount 10% 30% Longhot Company's management estimates that it can sell 15,000 units per year for the next five years and expects to sell them for $200 each Longshot Company's management team has identified four key value drivers for the project : unit sales, price per unit, variable cost per unit, and cash fred osts fixed costs other than depreciation) per year. The expected values for the value drivers, along with corresponding estimates for best and worst-case scenarios, are summarized as follows: + Expected or base case 15.000 $220 $150 $285,000 Worst case 12.500 180 Unit sales Price per unit Variable cost per un Fored cash cost per year Depreciation expense Best case 18.000 250 130 $285,000 160 $285,000 $90,000 $90,000 $90,000 Required: I 1 2 Calculate the Cash Flows for the project, showing the yearly cash flows for each of the three scenarios (42 marks) Calculate the Net Present Value for the project (6 marks) Show and present the answers Using the blank Excel Spreadsheet given. You may alter and amend any necessary in tems in the spreadsheet caddlines (6 marks) 3 Question 2 Longshot Company has the opportunity to manufacture and sell a novelty third brake light for automobiles. Producing the light requires an Initial investment of $500,000 in manufacturing equipment, which depreciates over a five year time period toward a $50,000 salvage value, plus an investment of $20,000 in net operating working capital. The discount rate used to analyze the project cash flows is 10 per cent (N. This rate is the opportunity cost of investing in the proposed investment and should reflect the risk of the investment. Other important information describing the investment opportunity is summarized as follows: Inital cost of equipment 1$500,000 Project and equipment life 5 years Salvage value of equipment $50,000 Working capital requirement $20,000 Depreciation method Straight Line Depreciation expense $90,000) Discount 10% 30% Longhot Company's management estimates that it can sell 15,000 units per year for the next five years and expects to sell them for $200 each Longshot Company's management team has identified four key value drivers for the project : unit sales, price per unit, variable cost per unit, and cash fred osts fixed costs other than depreciation) per year. The expected values for the value drivers, along with corresponding estimates for best and worst-case scenarios, are summarized as follows: + Expected or base case 15.000 $220 $150 $285,000 Worst case 12.500 180 Unit sales Price per unit Variable cost per un Fored cash cost per year Depreciation expense Best case 18.000 250 130 $285,000 160 $285,000 $90,000 $90,000 $90,000 Required: I 1 2 Calculate the Cash Flows for the project, showing the yearly cash flows for each of the three scenarios (42 marks) Calculate the Net Present Value for the project (6 marks) Show and present the answers Using the blank Excel Spreadsheet given. You may alter and amend any necessary in tems in the spreadsheet caddlines (6 marks) 3
