1. Aster Ltd is considering a proposal to expand its operations by processing fresh flowers for sale as dried flowers. The drying equipment has a purchase price of $450 000. The company will house the equipment in a disused storage shed. The equipment can be installed and the shed refurbished at a cost of $50 000. Freight and insurance charges of $10 000 will be paid to have the equipment delivered.

a) What is the installed cost of the project?

b) Aster currently has a very small amount of inventory. The raw materials inventory mainly consists of the cardboard boxes that the flowers are packed into for transport. The raw materials inventory would increase by about $2000 (the raw materials would be bought on credit) if the new project is adopted. The new drying project would need about $5000 of dried flowers to be held as the finished goods inventory. Aster's current suppliers of boxes, ribbon and wrapping paper for packaging the product are willing to offer the company credit for the additional packaging requirements associated with the project. Aster will not offer credit terms to its customers. What amount should be included in the initial outlay for the change in net working capital?

c) What is the initial outlay for Aster's flower drying project?

d) The following annual operating cash flow estimates have been provided by Aster Ltd's management for the proposed flower drying project: Year 1 sales: $150 000 Sales are expected to increase by $15 000 for each of the following 6 years Sales diverted from existing fresh flower sales: $1000 each year Cost of growing additional flowers for drying: 30% of sales Labour: $30 000 for the first 3 years and $50 000 for the following 3 years Electricity: 15% of sales Advertising cost for each of the first 2 years: $10 000; $5 000 for years 3-6.

Determine the annual net operating cash flow for the flower drying project.

e) Aster Ltd's flower drying project is expected to continue for 6 years. The useful life of the flower drying machine is 6 years. At the end of this time the machine can be sold as scrap for $25 000. The net increase in working capital of $5 000 at the project's inception will be returned upon completion of the project. What is the terminal value?

f) Construct a table of the annual cash flows for Aster's flower drying project. Use the initial outlay, annual operating cash flows and the terminal value you have calculated above and the discount rate of 14%, calculate the project's NPV and conclude whether the project be accepted or not.