What is the net present value of the project

Reference no: EM131053588 , Length: word count:2250

Part A-

You are in the final stage of the selection process for the job of assistant financial analyst at the Antipodes Mineral Resources company (AMR). This involves a test of your understanding of basic financial concepts. You are given the following memo and asked to respond to the questions. Whether or not you are offered a position at the company will depend on the quality of your responses.

To: Applicants for the position of assistant financial analyst
From: K. Abbott-Gill, CFO, Antipodes Mineral Resources Co. (AMR)
Re: A test of your understanding of basic financial concepts

Please respond in writing to the following questions:

1. What types of investment projects would you expect to find ina minerals company?

2. You will be working in the CFO's office if you obtain this job. What activities do you expect are undertaken in this office?

3. AMR is a public company, listed on the stock exchange. How does this fact have a bearing on the goal we should bear in mind when managing our finances?

4. Does or should AMR have any other accountabilities apart from responsibilities to the firm's owners?

Part B-

RWE Enterprises, Inc. (RWE) is a small manufacturing firm located in the hills just outside Adelaide, South Australia. The firm is engaged in the manufacture and sale of feed supplements used by cattle raisers. The product has a molasses base but is supplemented with minerals and vitamins that are generally thought to be essential to the health and growth of beef cattle. The final product is put in 50-kg or 90-kg tubs that are then made available for the cattle to lick as desired. The material in the tub becomes very hard, which limits the animals' consumption. The firm has been running a single production line for the past five years and is considering the addition of a new line. The addition would expand the firm's capacity by almost 120% since the new equipment requires a shorter down time between batches. After each production run, the boiler used to prepare the molasses for the addition of minerals and vitamins must be heated to 85° C and then must be cooled down before beginning the next batch. The total production run entails about four hours and the cool-down period is two hours (during which time the whole process comes to a halt).

Using two production lines would increase the overall efficiency of the operation since workers from the line that is cooling down could be moved to the other line to support the ‘canning' process involved in filling the feed tubs.

The second production line equipment would cost $3 million to purchase and install and would have an estimated life of 10 years at which time it could be sold for an estimated after-tax scrap value of $200 000. Furthermore, at the end of five years the production line would have to be refurbished at an estimated cost of $2 million. RWE's management estimates that the new production line would add $700 000 per year in after-tax cash flow to the firm. The 10-year cash flows for the line are as follows

YEAR	CASH FLOW
0	-$300,000
1	700,000
2	700,000
3	700,000
5	700,000
6	-1,300,000
7	700,000
8	700,000
9	700,000
10	900,000

Questions-

1. If RWE uses a 10% discount rate to evaluate investments of this type, what is the net present value of the project? What does this NPV indicate about the potential value RWE might create by purchasing the new production line?

2. Calculate the internal rate of return and profitability index for the proposed investment. What do these two measures tell you about the project's viability?

3. Calculate the payback and discounted payback for the proposed investment. Interpret your findings.

2250 words.

15 apa reference.

Reference no: EM131053588

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