Question (a) Critically explain how inflation influence the rate of retum of corporate investments, and the difference between real and nominal method to project assessment with the existence of inflation (8 marks) 6) Astra ple is looking forward to invest in extra production of pendrives. Several consulting firms have conducted research for the firm and they found that there is an opportunity to sell an extra quantity of pendrives of 800,000 units per year. The research cost 0.2 million but this cost has not been fully paid yet. The price and the structure of cost of a pendrive is as the following: f f Price per unit 24.00 Costs of output per unit Material cost per unit 3.00 Manpower cost per unit 1.00 Variable cost per unit 1.00 Fixed cost per unit 3.00 (8.00) Profit 16.00 The fixed cost is derived from selling costs. This is predicted to increase by l mill per year due to this project investment. The line of production is predicted to run for 5 years and incur a cost of 22 mill, including l mill of material inventories. The technical machine will have a balance value of 4 mill. Due to the fact that the firm is embracing JIT policy of inventory management, the investment is predicted to incorporate decreasing working capital requirements with 6% decline per year on a volume basis. The line of production will be placed in an unoccupied building where another firm has offer 4 mill to purchase it. If the building is not sold, real estate price inflation will push up the value of the building to 6 mill after 5 years. While the exact price and inflation rates are unpredictable. Astra's economists made the following predictions with respect to the mean inflation rates per year related to the investment project: Index of retail prices Prices of pendrives Prices of material Rates of manpower salary Variable costs Other variable costs Note: Tax and allowance for capital do not apply. 5% per annum 4% per annum 2% per annum 6% per annum 6% per annum 4% per annum Required: Astra's equity owners want a real rate of return of 7.5% for this project. Assess the feasibility of this investment. (17 marks) [Total : 25 Marks] Question (a) Critically explain how inflation influence the rate of retum of corporate investments, and the difference between real and nominal method to project assessment with the existence of inflation (8 marks) 6) Astra ple is looking forward to invest in extra production of pendrives. Several consulting firms have conducted research for the firm and they found that there is an opportunity to sell an extra quantity of pendrives of 800,000 units per year. The research cost 0.2 million but this cost has not been fully paid yet. The price and the structure of cost of a pendrive is as the following: f f Price per unit 24.00 Costs of output per unit Material cost per unit 3.00 Manpower cost per unit 1.00 Variable cost per unit 1.00 Fixed cost per unit 3.00 (8.00) Profit 16.00 The fixed cost is derived from selling costs. This is predicted to increase by l mill per year due to this project investment. The line of production is predicted to run for 5 years and incur a cost of 22 mill, including l mill of material inventories. The technical machine will have a balance value of 4 mill. Due to the fact that the firm is embracing JIT policy of inventory management, the investment is predicted to incorporate decreasing working capital requirements with 6% decline per year on a volume basis. The line of production will be placed in an unoccupied building where another firm has offer 4 mill to purchase it. If the building is not sold, real estate price inflation will push up the value of the building to 6 mill after 5 years. While the exact price and inflation rates are unpredictable. Astra's economists made the following predictions with respect to the mean inflation rates per year related to the investment project: Index of retail prices Prices of pendrives Prices of material Rates of manpower salary Variable costs Other variable costs Note: Tax and allowance for capital do not apply. 5% per annum 4% per annum 2% per annum 6% per annum 6% per annum 4% per annum Required: Astra's equity owners want a real rate of return of 7.5% for this project. Assess the feasibility of this investment. (17 marks) [Total : 25 Marks]
