Project 2 Calculations must be done in Excel - You must create your own spreadsheet (do...

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Project 2 Calculations must be done in Excel - You must create your own spreadsheet (do not copy and paste someone else's). This question should be done using Method 1 as outlined in lecture 6 (i.e. Tax Effects, then Cash Flows then NPV). As the financial advisor to Have Fun Manufacturing you are evaluating the following new investment in a manufacturing project: - The project has a useful life of 8 years. Land costs $10m and is estimated to have a resale value of $25m at the completion of the project. Buildings cost $12m, with allowable depreciation of 8% pa reducing balance and a salvage value of $10m. Equipment costs $5m, with allowable depreciation of 15% pa reducing balance and a salvage value of $1m. An investment allowance of 20% of the equipment cost is available. Revenues are expected to be $13m in year one and rise at 5% pa. Cash variable costs are estimated at 40% of revenue. Cash fixed costs are estimated at $3m pa. Tasks The firm has spent $2m on research and development for the project. Managerial salaries of $900,000 will be allocated to the project, but these managerial positions will be unaffected by the acceptance of the project. An amount of $200,000 has been spent on a feasibility study for the new project. The project is to be partially financed with a loan of $14m to be repaid annually with equal instalments at a rate of 3% pa over 8 years. Except for initial outlays, assume cash flows occur at the end of each year. The tax rate is 30% and is payable in the year in which profit is earned. The after-tax required return for the project is 12% pa. (a) Calculate the NPV. Is the project acceptable? Why or why not? Explain and defend your processes, answer, and calculations clearly. (b) Conduct a sensitivity analysis showing how sensitive the project is to revenues, fixed costs and to the required rate of return. Explain and defend your processes, answer, and calculations clearly. Project 2 Calculations must be done in Excel - You must create your own spreadsheet (do not copy and paste someone else's). This question should be done using Method 1 as outlined in lecture 6 (i.e. Tax Effects, then Cash Flows then NPV). As the financial advisor to Have Fun Manufacturing you are evaluating the following new investment in a manufacturing project: - The project has a useful life of 8 years. Land costs $10m and is estimated to have a resale value of $25m at the completion of the project. Buildings cost $12m, with allowable depreciation of 8% pa reducing balance and a salvage value of $10m. Equipment costs $5m, with allowable depreciation of 15% pa reducing balance and a salvage value of $1m. An investment allowance of 20% of the equipment cost is available. Revenues are expected to be $13m in year one and rise at 5% pa. Cash variable costs are estimated at 40% of revenue. Cash fixed costs are estimated at $3m pa. Tasks The firm has spent $2m on research and development for the project. Managerial salaries of $900,000 will be allocated to the project, but these managerial positions will be unaffected by the acceptance of the project. An amount of $200,000 has been spent on a feasibility study for the new project. The project is to be partially financed with a loan of $14m to be repaid annually with equal instalments at a rate of 3% pa over 8 years. Except for initial outlays, assume cash flows occur at the end of each year. The tax rate is 30% and is payable in the year in which profit is earned. The after-tax required return for the project is 12% pa. (a) Calculate the NPV. Is the project acceptable? Why or why not? Explain and defend your processes, answer, and calculations clearly. (b) Conduct a sensitivity analysis showing how sensitive the project is to revenues, fixed costs and to the required rate of return. Explain and defend your processes, answer, and calculations clearly.