Question 3 Suppose a firm is considering the following project. In year 0, the project requires $380,000 investment in plant and equipment, is depreciated using the straight-line method over five years, and there is a salvage value of $40,800 in year 5. The project is forecast to generate sales of 100,000 units in year 1, growth by 20 percent every year and achieve 172,800 units in year 4, dropping to 80,000 units in year 5, and zero in year 6. The inflation rate is forecast to be 2% in year 1 and year 2, rising to 3.2% in year 3, and 3.6% in year 4 and 5. The real cost of capital is forecast to be 9.5% in year 1, rising to 10.8% in year 5. The tax rate is forecast to be a constant 35.0%. Sales revenue per unit is forecast to be $11.30 in year 1 and then grow with inflation. Direct Labor, Materials, Selling Expenses, and Other Variable Costs are forecast to be $1.20, $0.70, $1.30, and $0.80, respectively, in year 1 and then grow with inflation. Lease Payment, Property Taxes, Administration, Advertising, and Other cash fixed costs are forecast to be $410,000, $73,000, $68,000, $112,000, and $73,000 respectively, in year 1 and then grow with inflation. What are the Total Variable Costs / Unit, the Total Cash Fixed Costs, the project NPV and payback period? The key assumptions are given in the table below. Key Assumptions Base Case Unit Sales Inflation Rate Real Cost of Capital Tax Rate Year 0 Year 1 Year 2 100,000 120,000 2.0% 9.5% 35.0% Year 3 Year 4 Year 5 144,000 172,800 2.0% 3.2% 3.6% 10.2% 10.4% 10.6% 35.0% 35.0% 35.0% 80,000 3.6% 10.8% 35.0% (Total: 32 marks) Question 3 Suppose a firm is considering the following project. In year 0, the project requires $380,000 investment in plant and equipment, is depreciated using the straight-line method over five years, and there is a salvage value of $40,800 in year 5. The project is forecast to generate sales of 100,000 units in year 1, growth by 20 percent every year and achieve 172,800 units in year 4, dropping to 80,000 units in year 5, and zero in year 6. The inflation rate is forecast to be 2% in year 1 and year 2, rising to 3.2% in year 3, and 3.6% in year 4 and 5. The real cost of capital is forecast to be 9.5% in year 1, rising to 10.8% in year 5. The tax rate is forecast to be a constant 35.0%. Sales revenue per unit is forecast to be $11.30 in year 1 and then grow with inflation. Direct Labor, Materials, Selling Expenses, and Other Variable Costs are forecast to be $1.20, $0.70, $1.30, and $0.80, respectively, in year 1 and then grow with inflation. Lease Payment, Property Taxes, Administration, Advertising, and Other cash fixed costs are forecast to be $410,000, $73,000, $68,000, $112,000, and $73,000 respectively, in year 1 and then grow with inflation. What are the Total Variable Costs / Unit, the Total Cash Fixed Costs, the project NPV and payback period? The key assumptions are given in the table below. Key Assumptions Base Case Unit Sales Inflation Rate Real Cost of Capital Tax Rate Year 0 Year 1 Year 2 100,000 120,000 2.0% 9.5% 35.0% Year 3 Year 4 Year 5 144,000 172,800 2.0% 3.2% 3.6% 10.2% 10.4% 10.6% 35.0% 35.0% 35.0% 80,000 3.6% 10.8% 35.0% (Total: 32 marks)
