Tashkent Manufacturing Pte Ltd is evaluating a capital investment to produce a new product known as Tesla battery in 2020. It will cost U$20m. This amount will be payable at the start of the first year of operation i.e., 2021. The product will be produced for four years, at the end of the fourth year, production will cease. The scrap value of investment project at the end of the fourth year is zero.

1. Calculate the expected net present value of the investment project and analyse its financial acceptability and on the risk relating to variable cost.
2. Critically analyse the problems in making investments in foreign countries. 
3. Capital budgeting is an important process of any business activity. Vast amount of money can be easily wasted if the investment turns out to be wrong. Critically discuss and analyse whether you agree with the statement. 

Transcribed Image Text:

Following is the financial information relating to the investment project: Year Sales volume (units/year) 440,000 Selling price ($/unit) Fixed cost ($/year) 1 2 3 4 550,000 720,000 400,000 26.50 1,100,000 28.50 30.00 26.00 1,121,000 1,155,000 1,200,000 The selling price inflation is expected to be 3·5% per year. The Variable cost per unit will be very dependent on suppliers of key components and their competitiveness price quotes. The purchasing department has made the following forecast: Probability of getting the various prices Variable cost ($/unit) 45% 35% 20% 10.80 12.00 14-70 The variable costs in this forecast are before taking account of variable cost inflation of 4.0% per year. Tashkent Manufacturing Pte Ltd can claim tax-allowable depreciation on a 25% per year reducing balance basis on the full investment cost of $20m. Their corporation tax is 28% per year payable one year in arrears. The investment project is financed by an issuance of 8% loan notes, redeemable in ten years' time. Tashkent Manufacturing Co has a nominal after-tax weighted average cost of capital of 10%, a real after-tax weighted average cost of capital of 7% and a cost of equity of 11%. Following is the financial information relating to the investment project: Year Sales volume (units/year) 440,000 Selling price ($/unit) Fixed cost ($/year) 1 2 3 4 550,000 720,000 400,000 26.50 1,100,000 28.50 30.00 26.00 1,121,000 1,155,000 1,200,000 The selling price inflation is expected to be 3·5% per year. The Variable cost per unit will be very dependent on suppliers of key components and their competitiveness price quotes. The purchasing department has made the following forecast: Probability of getting the various prices Variable cost ($/unit) 45% 35% 20% 10.80 12.00 14-70 The variable costs in this forecast are before taking account of variable cost inflation of 4.0% per year. Tashkent Manufacturing Pte Ltd can claim tax-allowable depreciation on a 25% per year reducing balance basis on the full investment cost of $20m. Their corporation tax is 28% per year payable one year in arrears. The investment project is financed by an issuance of 8% loan notes, redeemable in ten years' time. Tashkent Manufacturing Co has a nominal after-tax weighted average cost of capital of 10%, a real after-tax weighted average cost of capital of 7% and a cost of equity of 11%.

Answer rating: 100% (QA)

To calculate the expected net present value NPV of the investment project we need to follow these steps 1 Calculate the annual cash flows revenues and ... View the full answer