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Washed Water Limited is a technology manufacturer that produces water purification products for businesses. Washed Water is embarking on extensive new product development and a

Washed Water Limited is a technology manufacturer that produces water purification products for businesses. Washed Water is embarking on extensive new product development and a marketing drive to grow the business. The company needs to compile its three-year forecast. The following information is known:

The forecast period is from 2021 to 2023 (three years). The current sales (2020) of 3 600 units are expected to grow by 13% each year.

Product development costs of R14,2 million have been incurred in 2020 and will be capitalised over the forecast period.

Washed Water requires a minimum net present value (NPV) of R65 million to satisfy its shareholders.

The WACC of Washed Water is 16%. Advertising in 2021 is expected to be R3 800 000.

Operating expenses are expected to be R18 700 000 in the first year of expansion.

The inflation rate is expected to remain constant at 4% per year over the forecast period.

The inflation rate is used to forecast all cost and expense increases.

The average selling price in 2020 is set at R48 000 per unit. The company intends limiting the selling price increase to the inflation rate plus 2% every year. The products gross margin in 2020 is 35%.

The corporate tax rate is 28%

2.1 a) Forecast the sales demand (number of units) for each of the years (2021, 2022 and 2023) for Washed Water. Show all workings.

b) Using your answer from a), forecast the total contribution and the profit before tax for Washed Water for each of the years (2020, 2021 and 2022). Use the template provided below.

2021

2022

2023

Selling price (per unit)

Variable Cost (per unit)

Contribution per unit

Unit Sales

Total sales Value

Operating expenses

Advertisement Expenses

Total profit before tax

c) Calculate and state whether the forecasted contribution calculated in b) will reach the required after-tax NPV of future cash flows. Show all calculator inputs and workings.

d) Ignoring your answer in c), if the calculated NPV is R75 million, calculate the sensitivity of the variable costs to the NPV if the NPV cannot fall below R65 000 000. Explain what your calculated answer means.

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