QUESTION FIVE

Tommy-Apparels CFO, Pacioli has been asked by CEO Martin, to help with their capital investment appraisal. They have recently completed a feasibility study on whether, or not, to expand their market offerings and offer specially designed Slim Blazers for men and invest on capital infrastructure for the production line. The market research indicates no other competitors have ever sold this specially designed product before. It might open a completely new market for Tommy-Apparel. In addition, it was established that this special blazer can be sold via (e-trade) on-line trading system. Based on the results of the study, Tommy-Apparel has estimated 120,000 Blazers can be sold annually over the five years at a starting price of $64 for each Slim Blazer Jacket. Given the fast-paced technology associated with high competition, Tommy-Apparels management believe the life cycle will be short and therefore the company will only be able to sell $64 per Blazer for Years 1 and 2 only. The selling prices will be reduced in Years 3 and 4 to $63 and to $61 in year 5. Variable costs are $43 per unit and fixed operating costs amount to $475,000 per year.

The project cost includes $6,000,000 to extend their production facilities which will be fully depreciated in 5 years. Additional working capital specifically for this project is estimated to be $250,000 and will be returned at the end of the projects life. Tommy-Apparels CFO, Pacioli, is not completely certain about this project and would like your advice as the company havent sold online before. While the product looks like it will be attractive for men across the globe, Pacioli is unsure about the level of risk they will be exposed to with this project. The WACC of the company is estimated to be 11%.

REQUIRED:

1. Calculate the net present value of the project. Ensure you show your workings.
2. Advice Tommy-Apparels, management whether to proceed with the project.