A bottle company ALPHA is considering creating a new bottle of 0.25 lt. To decidewhether to invest in this projector not, they performed market research the costed €5,000. The results indicated two possible scenarios that depend on the competitor's reaction to creating a similar product and on the percentage of faithful customers of ALPHA. Scenario A has a 45% chance to be realized, while scenario B has a probability of 55%.

For the project's realization, the company must purchase special machinery that cost €80,000, while transportation and installation costs amount to €2,000. The useful life of the project is two years, and the machinery can be sold at the end of the useful life for €30,000. Table 1 presents the pertinent economic data. At the end of the second year, the working capital is going to be recaptured. The tax rate is 25%, the weighted average cost of capital is 10% and the company fully depreciates fixed assets for tax purposes, using the straight-line depreciation method.

 

Table 1: Pertinent economic data

	Year 1		Year 2
	Scenario  Α	Scenario  Β	Scenario  Α	Scenario  Β
Sales in pieces	150,000	200,000	200,000	250,000
Variable costper unit of products	0.8	1	1	1.2
Sale price per unit of products	1.5	1.7	1.8	2
Administrative &marketing expenses	20,000	25,000	25,000	30,000
Working Capital	15,000	15,000	17,000	17,000

Questions:

1) Calculate the expected net cash flows for each one of the two years?

2) Calculate and comment on the standard deviations and the coefficient of variations of the NCFs of each year. What do they mean and what do they imply?

3) Should ALPHA proceed with the new bottle project based on the NPV evaluation approach?

Answer rating: 100% (QA)

To calculate the expected net cash flows NCFs for each year we first need to calculate the sales revenue variable costs contribution margin sales revenue variable costs and fixed costs administrative ... View the full answer