What is the irr of the project, Financial Management

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QUESTION

Part A:

1. Nev Plc is considering to invest in a machine to manufacture a new line of umbrellas. The following data has been assembled in respect of the investment:

2. Market research has just been carried out at a cost of $22500. The study estimated the revenue from the new umbrella and the effect on the existing products to be

Year

Revenue from New Umbrella $000's

Loss Revenue from existing products $000's

1

100

30

2

120

25

3

140

10

4

120

-

The annual variable costs associated with expected sales and saving from reduced production of existing products are expected to be:

Year

Variable costs of making new umbrella $000's

Costs saved on existing Umbrella $000's

1

60

20

2

65

15

3

70

5

4

60

-

3. Fixed costs such as rent, rates, etc which are unaffected by the investment will be $52,500 per year.

4. The machine to be used will cost $ 120,000 payable immediately. It will be depreciated using the straight line method. The residual value will be nil.

5. The cost of capital is 10%.

Required:

i) Calculate the NPV of the project. Should Nev plc invest?

ii) What is the IRR of the project?

iii) Briefly explain why relative merits of the NPV methodology as compared to the payback method.

Part B:

Value a $1000 par value bond that pays coupon payment bi annually with a maturity period of 5 years. The interest rate on coupon is 5% p.a. The discounting factor is 10%.

 


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