XYZ Limited is considering to introduce a new fad product which is envisaged to stay in the market for five years from today. The company requires a return of 15% from the project. The following information is available for this new project: Cost of new equipment to be acquired: $15,800,000 Installation and commissioning of new equipment: $200,000 Depreciation: The new equipment will be depreciated using straight-line depreciation over five years with no salvage value. The company is subject to 30% income tax for both income and capital gains. Sales in units for the next five years are projected as follows: Year 1 2 3 Units 140,000 240,000 280,000 160,000 160,000 Projected selling price per unit $600 $600 $600 $600 $520 4 5 Variable expenses per unit: $360 Fixed expenses per year: $400,000 Working capital: Required initial working capital to get production started:$200,000. Annual net working capital requirement amounts to ten per cent (10%) of the sales revenue of each year. All working capital is to be liquidated at the termination of the project at the end of year 5. Anticipated inflation rate over the next five years is 2% per annum. Required: (show your workings) You have been asked to provide recommendation on the feasibility of the project. Using Excel, calculate initial cash flow, operational cash flows, terminal cash flow and the free cash flow. (ii) Calculate the real rate of interest, and sing Excel, calculate the project's net present value (NPV). Show all your workings. (iii) Using Excel, calculate the internal rate of return for the project? (iv) In consideration of NPV and IRR calculated in b and c above, do you recommend the project to go ahead? Consider both quantitative and qualitative factors and justify your decision XYZ Limited is considering to introduce a new fad product which is envisaged to stay in the market for five years from today. The company requires a return of 15% from the project. The following information is available for this new project: Cost of new equipment to be acquired: $15,800,000 Installation and commissioning of new equipment: $200,000 Depreciation: The new equipment will be depreciated using straight-line depreciation over five years with no salvage value. The company is subject to 30% income tax for both income and capital gains. Sales in units for the next five years are projected as follows: Year 1 2 3 Units 140,000 240,000 280,000 160,000 160,000 Projected selling price per unit $600 $600 $600 $600 $520 4 5 Variable expenses per unit: $360 Fixed expenses per year: $400,000 Working capital: Required initial working capital to get production started:$200,000. Annual net working capital requirement amounts to ten per cent (10%) of the sales revenue of each year. All working capital is to be liquidated at the termination of the project at the end of year 5. Anticipated inflation rate over the next five years is 2% per annum. Required: (show your workings) You have been asked to provide recommendation on the feasibility of the project. Using Excel, calculate initial cash flow, operational cash flows, terminal cash flow and the free cash flow. (ii) Calculate the real rate of interest, and sing Excel, calculate the project's net present value (NPV). Show all your workings. (iii) Using Excel, calculate the internal rate of return for the project? (iv) In consideration of NPV and IRR calculated in b and c above, do you recommend the project to go ahead? Consider both quantitative and qualitative factors and justify your decision
