SECTION B Question 13 Finance: Balon Enterprises is looking to invest in a new product to extend their operations. The new project is expected to require an initial cash investment of $350,000 plus additional working capital of $50,000 will be required and this will be recovered at the end of year 6. At the end of the project the initial investment will have an expected salvage value of $0. Cash inflows of $100,000 are expected at the end of each year for 5 years and then in year 6 the inflows are expected to drop off to $30,000. The company's required rate of return of any project is 12%. Assume cash returns occur at the end of each year apart from the initial investment. Use the required rate of return as the discount rate and use the tables at the back of this booklet to find the discount rates. Ignore tax. Required: (a) Conduct a net present value analysis for the new project. Show your workings. (6 marks) (b) Based on the NPV analysis, state whether Balon Enterprises should invest in this new project and explain why. (2 marks - max 50 words) (c) The Chief Financial Officer is concerned that the effects of COVID19 will mean that the forecasted cash inflows will only be $80,000 each year for years 1 to 5 and all other cash flows remain the same. Describe the effect of this change in estimate on the NPV. No calculation is required. (2 marks - max 50 words) (Total for question: 10 marks) Time Cash Flow Discount Factor Description of cash flow Present Value NPV You can add extra lines if required Workings