Riverland company is considering a new project for production and sales of new components for the automotive industry. The company's goal is to enter the US market, so Riverland hired a market research agency that has projected the quantity demanded and sales (in units) as provided in the table. The costs of the market research agency have already been paid in the amount of $ 150,000 Year 1 2 3 4 Demand and sales in units) 350.000 380.000 400.000 350.000 In addition to the given data, you have also received the following information: 1. The new production will include the production of two components with equal share in quantity demanded and units sold. The selling price of component A costs $ 1 per unit while component B costs $ 2 per unit. 2. It is necessary to buy new machines that amount to $ 300,000. Machines are to be paid immediately, and since they are highly specialized, it is expected that they will not have a residual value at the end of the project. 3. The project is expected to last for four years, and will not be continued. As a result, production and sales will not continue after the fourth year. 4. The company's administrative costs amount to $80,000 per year, but are not directly related to this project 5. Machines are depreciated on a straight-line basis over the next four years and their value is expected to be zero at the end of the fourth year. 6. Direct production costs are expected to annually amount to $ 250,000. These costs are expected to grow at inflation rate of 5% annually from the first year of the project. 7. Software license and maintenance costs of the machines annually amount to $ 15,000 and will be paid from the start of production in the first year until the end of the project. 8. It is necessary to employ additional staff that will operate the machines. Four people are going to be employed and their individual annual gross salary is $ 30,000. Salaries are expected to grow by 3% per year starting from the start of production in the first year. 9. The company will have to pay for the training of the new staff but only in the first year of production. Staff training costs are expected to be $ 15,000 in total. 10. It is assumed that Riverland's cost of capital is 9%. Ignore taxes. Required: a) Calculate the net cash flow of this project (13 marks) b) Calculate the net present value of the project. (4 marks) c) According to the NPV method, the project is accepted. Answer: a) yes or b) no. (1 mark) d) Calculate the MIRR of the project. (4 marks) e) According to MIRR method, the project is accepted. Answer: a) yes or b) no (1 mark) Total (23 marks) Important notes: 1. Do not separate number values with commas after third digit (e.g. 10.000 S in answers should be written as 10000) 2. When entering the value for MIRR, enter percentage value without % symbol, (eg. 12% should be entered as 12) Solution: a) Year 0 1 2 3 NCF (Net cash flow) Riverland company is considering a new project for production and sales of new components for the automotive industry. The company's goal is to enter the US market, so Riverland hired a market research agency that has projected the quantity demanded and sales (in units) as provided in the table. The costs of the market research agency have already been paid in the amount of $ 150,000 Year 1 2 3 4 Demand and sales in units) 350.000 380.000 400.000 350.000 In addition to the given data, you have also received the following information: 1. The new production will include the production of two components with equal share in quantity demanded and units sold. The selling price of component A costs $ 1 per unit while component B costs $ 2 per unit. 2. It is necessary to buy new machines that amount to $ 300,000. Machines are to be paid immediately, and since they are highly specialized, it is expected that they will not have a residual value at the end of the project. 3. The project is expected to last for four years, and will not be continued. As a result, production and sales will not continue after the fourth year. 4. The company's administrative costs amount to $80,000 per year, but are not directly related to this project 5. Machines are depreciated on a straight-line basis over the next four years and their value is expected to be zero at the end of the fourth year. 6. Direct production costs are expected to annually amount to $ 250,000. These costs are expected to grow at inflation rate of 5% annually from the first year of the project. 7. Software license and maintenance costs of the machines annually amount to $ 15,000 and will be paid from the start of production in the first year until the end of the project. 8. It is necessary to employ additional staff that will operate the machines. Four people are going to be employed and their individual annual gross salary is $ 30,000. Salaries are expected to grow by 3% per year starting from the start of production in the first year. 9. The company will have to pay for the training of the new staff but only in the first year of production. Staff training costs are expected to be $ 15,000 in total. 10. It is assumed that Riverland's cost of capital is 9%. Ignore taxes. Required: a) Calculate the net cash flow of this project (13 marks) b) Calculate the net present value of the project. (4 marks) c) According to the NPV method, the project is accepted. Answer: a) yes or b) no. (1 mark) d) Calculate the MIRR of the project. (4 marks) e) According to MIRR method, the project is accepted. Answer: a) yes or b) no (1 mark) Total (23 marks) Important notes: 1. Do not separate number values with commas after third digit (e.g. 10.000 S in answers should be written as 10000) 2. When entering the value for MIRR, enter percentage value without % symbol, (eg. 12% should be entered as 12) Solution: a) Year 0 1 2 3 NCF (Net cash flow)
