Reference no: EM132523911

All amounts are in $AUD. Blackmores is evaluating to invest into a new manufacturing facility in Asia. In order to mitigate the risk and assess the fit for purpose of this manufacturing plant Blackmores asked "SGS Ltd." to conduct a technical due diligence on the plant and advise on the feasibility of this project. "SGS Ltd." is asking $1 Million as a fixed fee for its consulting services. The manufacturing plant has an initial outlay of dollars $500 million and will produce 150,000,000 tablets ready for sale starting at the end of year 1 until the end of year 5 and 250,000,000 tablets starting at the end of year 6 until the end of year 10. It will also incur working capital expenses at the end of year 1 to 5 of $1 million (this working capital will not be recovered). Assume that the average selling price of a single tablet is $1 over the ten years. The operating costs of the project will be 35% of the revenues from year 1-10. The investment will be depreciated on a straight-line basis over ten years to 0 book value. Blackmores has estimated that the manufacturing plants can be sold at the end of year 10 for $10 million. The tax rate is 30%. All cash flows are annual and are received at the end of the year. The weighted average cost of capital for Blackmores is 10%

a) Based on the above information calculate the FCFs of the project.

b) Calculate the NPV for the new manufacturing facility assuming that the cost of capital is 10% and 15%. Which discount rate should Blackmores use given that this project has a higher risk than the overall risk of the company?

c) Blackmores would like to recover the investment within 5 years. What is the Discounted Payback Period for the project (both at Cost of Capital of 10% and 15%)?

d) Based on your analysis a) to d) should Blackmore undertake this project? Justify your answer with reference to theory.