FIN $300$ TUTORIAL CASE

TOPIC $2$

Mathangwane $($Pty$)$ Ltd is considering a project to launch a new product. The basic cost for project's machinery is P$720,000.$ The ancillary costs of shipping and installing this machine is P$80,000.$ This project is expected to run for $4$ years, and will attract a salvage value of P$200,000$ at the end of year four. The Tax Authority allows for this machine to be depreciated on a straightline basis for the four$-$year period. The required rate of return on the project is $12\%$ and the relevant tax rate is $25\%.$

The base$-$case figures for this project are as follows are;

Sales are projected at $2000$ units per year

Price per unit is $P2,100$

Variable costs per unit will be P$1,500$

Fixed costs are $P450,000$ per year

It is estimated that the projected figures in No$.1-4$ above are probably accurate to within $\frac{+}{-}5\%.$

The probabilities of occurrence of the different "cases$/$states$"$ under under which this project could unfold are as follows; base case, $50\%$; best case $20\%$; worst case, $30\%.$

You are required to;

A$.$ Calculate the base case Operating Cash Flow $($using the "tax shield approach"$)$ and the NPV of this project.

B$.$ Calculate the sensitivity of the base case NPV to changes in "price per unit" and "fixed costs". Which of these two is the NPV most sensitive to$?$