Question
The Sallano Corporation, manufacturer of office furniture, has received a request from Global Retailers Inc. for a special project. The Global Retailers wants to buy
The Sallano Corporation, manufacturer of office furniture, has received a request from Global Retailers Inc. for a special project. The Global Retailers wants to buy 25,000 units of specially designed desk lamps each year for the next four years. To produce the new product Sallano will have to buy new machinery costing Rs. 900,000. The machine will be depreciated towards a zero salvage value on straight line basis over its economic life of 5 years of tax purposes. The firm will sell the machine after four years at an estimated price of 90,000. Operating expenses for the new product, not including depreciation, will be Rs. 180,000 per year. An investment of 50,000 in raw material inventory will be required initially, although the amount will be recovered at the end of the project. The firms tax rate is 25% and its Cost of Equity is 16%. Sallano Corporation will borrow 450,000 at Cost of Debt of 12%.. Global retailers has announced a bench mark price of Rs. 30 for the product, but they will award the project to the lowest bidder. a. What are the annual net cash flows, WACC and NPV of the project (All Investor Cash Flows) at the benchmark price? b. What is the lowest price to be charged for the product by Sallano in order not to reduce the value of Company? c. Comment on the Feasibility of the special project
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