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Question 3 (answer all parts of the question) Bright Plastics has developed a new compound at a cost of $250,000 over the last few months.

Question 3 (answer all parts of the question)

Bright Plastics has developed a new compound at a cost of $250,000 over the last few months. This compound could go into full production, and sales could start from 1 September 2020. The following information relates to the project cost and its annual production and sales:

Cost of equipment and machinery$450,000 Project life5 years Sales (quantity)150,000 kgsSale price per kg$5Variable cost per kg$3Fixed cost per year$160,000 Fixed cost per year excludes depreciation (calculated on straight-line basis). It is estimated that the equipment and machinery will have no residual value at the end of the project. The opportunity cost of capital of Bright Plastics is 12 percent. Ignore taxation and inflation.

i. Estimate the net present value of the project.

ii. How sensitive (in percentage) is the project to changes in the cost of equipment and machinery?

iii. How sensitive (in percentage) is the project to changes in the quantity sold?

iv. How sensitive (in percentage) is the project to changes in the sales price?

v. What is sensitivity analysis? carry out a statement about the sensitivity of different factors conducted in Parts (ii, iii, and iv above) to be presented to the finance director.

[20 + 10 + 20 + 20 + 30 = 100 marks]

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