the two problems below (P1 and P2). Five marks each. Part marks will be allocated, but if you have the incorrect answer then you cannot expect to get more than half marks.

Project 1 (P1)

Polycorp is considering an investment in new plant of $2.95 million. The project will be financed with a loan of $1,500,000 which will be repaid over the next five years in equal annual end of year instalments at a rate of 7.15 percent pa. Assume diminishing value depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments and interest are shown in the table below. Cost of capital is 10.80% pa (the required rate of return on the project). A salvage value of $265,000 is expected at the end of year five and is included in the cash flows for year five below. Ignore taxes and inflation.

Year Year One Year Two Year Three Year Four Year Five
Cash Inflow 1,080,000 820,000 805,000 1,005,000 1,045,000

You are required to calculate:
(1) The amount of the annual loan repayment and produce a repayment schedule.
(2) NPV of the project (to the nearest dollar)
(3) IRR of the project (as a percentage to two decimal places)
(4) AE, the annual equivalent for the project(AE or EAV) (to the nearest dollar)
(5) PB, the payback and discounted payback in years (to one decimal place)
(6) ARR, the accounting rate of return (gross and net) (to two decimal places)
(7) PI (present value index or profitability index) (to two decimal places)
(8) Is the project acceptable? You must provide a decision or explanation for each of the methods in parts (2) to (7). Why or why not (provide a full explanation)? Also a brief explanation of your treatment of Salvage Value and Loan Repayments is required.


Project 2 (P2)

Polycorp Limited Steel Division is considering a proposal to purchase a new machine to manufacture a new product for a potential three year contract. The new machine will cost $1.6 million. The machine has an estimated life of three years for accounting and taxation purposes. The contract will not continue beyond three years and the equipment’s estimated salvage value at the end of three years is $198,000. The tax rate is 27 percent and is payable in the year after which profit is earned. An investment allowance of twenty percent on the outlay is available. The after tax cost of capital is 12.85%pa. Additional current assets of $65,000 are required immediately for working capital to support the project. Assume that this amount is recovered in full at the end of the three year life of the project. The new product will be charged $149,500 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage the project. This is in accordance with the firm’s policy of allocating all corporate overhead costs to divisions. Extra marketing and administration cash outflows of $151,000 per year will be incurred by the Steel Division for the project. An amount of $149,000 has been spent on a pilot study and market research for the new product. The projections provided here are based on this work. Projected sales for the new product are 31,000 units at $152 per unit per year. Cash operating expenses are estimated to be 71 percent of sales (excludes marketing and administration, and head office items). Except for initial outlays, assume cash flows occur at the end of each year (unless otherwise stated). Assume diminishing value depreciation for tax purposes.

Required
(a) Construct a table showing your calculations of net cash flow after tax (NCFAT). Use the method shown in lectures and notes.
(b) Calculate the NPV. Is the project acceptable? Why or why not?
(c) Conduct a sensitivity analysis showing how sensitive the project is to operating expenses and to the cost of capital. Explain.
(d) Write a short report explaining your calculation of relevant net cash flows after tax, justifying your selection of cash flows. Be sure to state clearly any assumptions made (implicit and explicit).

Posted Date: 1/12/2016 1:55:56 AM | Location : Australia

Ask an Expert

Related Discussions:- homework, Assignment Help, Ask Question on homework, Get Answer, Expert's Help, homework Discussions

Write discussion on homework
Your posts are moderated

Write your message here..

Related Questions

What are the main functions of the financial systems, What are the main fun... What are the main functions of the financial systems? The main functions of financial systems in short are as follows: a. Give the mechanisms by that funds can be transferre

The profitability index for the investment, Question   Clifton-Peters L... Question   Clifton-Peters Ltd is a manufacturer of household goods located in Melbourne. They presently make and wholesale fruit juicers, blenders and baking equipment. The Gen

Investment options - bond yields, John has just inherited $50,000 from his ... John has just inherited $50,000 from his Uncle Ted. John is currently studying his Bachelor of Accounting degree at CQUniversity part-time and has three (3) years of study remainin

Growth rate, Growth rate : The average of PC manufacturing industry growth ... Growth rate : The average of PC manufacturing industry growth rate was 22.24% for 2004, 20% for 2005, and 17.29% for 2006. It showed that the industry's growth rate has been declin

What are the types of money and bank regulations, What are the types of Mon... What are the types of Money and Bank Regulations? Types of Money : a. Commodity money b. A commodity-backed money c. Fiat money Bank Regulations: a. Deposit i

Monitoring costs - agency costs, Monitoring Costs - Agency Costs This ... Monitoring Costs - Agency Costs This is incurred to prevent undesirable managerial actions. They are meant to ensure that both parties live to the spirit of agency contract. T

Matching approach - financing current assets, Matching Approach - Financing... Matching Approach - Financing Current Assets This approach is further referred to as the hedging approach. Beneath this approach, the firm adopts a financial plan that involve

Example of stock market index, Example of Stock Market Index The follo... Example of Stock Market Index The following six companies constitute the index of democratic republic of Kusadikika.             Company  A  B

Aafafa, Ask lajgkjasbgksabgbaskjbaskjbasjgbhjabgjbjgbskjgbkasbgjkabksgbksbg... Ask lajgkjasbgksabgbaskjbaskjbasjgbhjabgjbjgbskjgbkasbgjkabksgbksbgkabkhvakkvbaoygfyabkbkkye#Minimum 100 words accepted#

Working capital cycle, Working Capital Cycle The Concept of Working C... Working Capital Cycle The Concept of Working Capital/Cash Operating Cycle Working capital cycle refers to period such elapses between the payment for raw materials bought