Telvo Pty Ltd is investigating whether or not they should invest in a new technology. $80,000 in consultation fees have already been paid.

Telvo Pty Ltd owns a building it currently leases for $120,000 per annum. The new technology will be placed in this building, therefore the lease agreement will need to be broken, the tenant will be evicted and compensation will be paid of $60,000

The new technology will cost $6,000,000 for equipment and refitting ready for production. Telvo will need to borrow 40% of the $6,000,000 required, at the interest rate of 2% p.a. Telvo Pty Ltd has determined a cost of capital for the project of 15%.

The following is the budgeted Income Statements for the project:

For purposes of undertaking a Net Present Value analysis, use the above information to choose the best answer for the following questions.

1. What is the net cash flow at year 1? (2 marks)

Select one:

a. $390,000

b. $450,000

c. -$110,000

d. $400,000

2. What is the total investment cost? (Initial outlay at time zero) (1 mark)

Select one:

a. $6,200,000

b. $6,100,000

c. $6,060,000

d. $6,000,000

Years 2 - 10 $3,600,000.00 $380,000.00 Telvo Pty Ltd (New Technology Project) Proforma (Budgeted) Income Statements Years 1 to 10 Year 1 Sales $1,100,000.00 Less Expenses Production costs $240,000.00 Marketing expenses $300,000.00 Administration expenses $50,000.00 Depreciation $ 600,000.00 Interest expense $ 48,000.00 Consultants fees (actual) $80,000.00 Total Expenses $1,318,000.00 Profit -$218,000.00 $100,000.00 $50,000.00 $ 600,000.00 $ 48,000.00 $1,178,000.00 $2,422,000.00 Years 2 - 10 $3,600,000.00 $380,000.00 Telvo Pty Ltd (New Technology Project) Proforma (Budgeted) Income Statements Years 1 to 10 Year 1 Sales $1,100,000.00 Less Expenses Production costs $240,000.00 Marketing expenses $300,000.00 Administration expenses $50,000.00 Depreciation $ 600,000.00 Interest expense $ 48,000.00 Consultants fees (actual) $80,000.00 Total Expenses $1,318,000.00 Profit -$218,000.00 $100,000.00 $50,000.00 $ 600,000.00 $ 48,000.00 $1,178,000.00 $2,422,000.00