A company is considering implementing a project that can be characterized as

follows:

Working capital will account for $20\%$ of turnover. The company uses a required rate

of return of $15\%$ for investments of this type.

A$.$ Budget the project's cash flow over its lifetime. Assumed, for the sake of

simplicity, that working capital is released in full at the end of its useful life

in year $4.$ Otherwise, make any assumptions you find relevant.

B$.$ Calculate net present value and internal rate of return. Do you recommend

that the investment be made?

C$.$ There is considerable uncertainty associated with some of the calculation

factors. Management therefore wishes to shed more light on the

uncertainty. Calculate how much the following sizes can be changed

before the project reaches the profitability threshold:

sales price

Quantity soid

fixed costs

Which factor seems to be most critical? Which factor seems to be most

critical? You can assume that your working capital requirement does not

change from what you received in A$).$

D$.$ The company management has spent NOK $500000$ on product

development. How does this affect the profitability calculations from A$?$

Should the project have been implemented?

E$.$ Now assume that the sales volume is no longer constant, but follows the

following pattern:

Production volume year $1$: $18,000$Praduction volume year $2$

$20,000$Production volume year $3$:$20,000$Production volume year $4$: $15,000$

Budget the project's cash flow when you also take this information into

account.

What will now be the project's net present value and internal rate of return?