The financial advisor to EEW Company is evaluating whether to keep company cars for 3, 4 or 5 years. The following information has been gathered:- 

A car costs $60,000 and depreciation is 20% pa straight-line.

Cash expenses are $15,000 per year for the first 2 years, $20,000 in year 3, $30,000 in year 4, $50,000 and $40,000 in year 5.

The salvage value is expected to be $30,000 after 3 years, $25,000 after 4 years and $15,000 after 5 years.

The after-tax required rate of return is 8% pa and the tax rate is 30%.

Required

Make an analysis to decide whether company cars should be kept for 3, 4, or 5 years before being replaced with new ones.

(3 Marks)

Project 2 Calculations must be done in Excel

As the financial advisor to Lockdown Manufacturing you are evaluating the following new investment in a manufacturing project:-

The project has a useful life of 10 years.

Land costs $12m and is estimated to have a resale value of $16m at the completion of the project.

Buildings cost $6m, with allowable depreciation of 6% pa reducing balance and a salvage value of $2m.

Equipment costs $5m, with allowable depreciation of 30% pa reducing balance and a salvage value of $1m. An investment allowance of 15% of the equipment cost is available.

Working capital of $2m is required at the start of the project but is anticipated to be recovered at the end of the project's life.

Revenues are expected to be $10m for the first 5 years and $8m for the next 5 years.

Cash expenses are estimated at $5m in year one and rise at 5% pa.

The new product will be charged $500,000 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage the project.

An amount of $150,000 has been spent on a feasibility study for the new project.

The project is to be partially financed with a loan of $15m to be repaid annually with equal instalments at a rate of 4% pa over 10 years.

Except for initial outlays, assume cash flows occur at the end of each year.

The tax rate is 30% and is payable in the year in which profit is earned.

The after tax required return for the project is 12% pa.

Required

(a)Calculate the NPV.Is the project acceptable? Why or why not?

(b)Conduct a sensitivity analysis showing how sensitive the project is to revenues, the resale value of the land and to the required rate of return. Explain your results.

(7 Marks)