Bright Inc is a big publicly traded company on the Ghana Stock Exchange. Based on a GHS 100,000 market feasibility study, the firm has considered the production and sale of new product line which was developed by the research and development unit of the firm at the cost of GHS 250,000. For a detailed analysis of the new project to be done, the finance department has put forward the following information on the investment proposal.
 

Initial investment ( straight line depreciation)	GHS 9,000,000
Scrap value ( year 4; tax paid year 5)	GHS 600,000
Selling price ( current price)	GHS 80 / unit
Expected selling price inflation	4% / year
Variable operating costs (current price)	GHS 35 / unit
Fixed operating costs	GHS 450,000
Expected operating cost inflation	3% / year

Demand estimates for the product from there market research is expected to be as follows;
 

Year	1	2	3	4
Demand (units)	50,000	85,000	100,000	75,000

Bright has a real hurdle rate of 12%. Expected inflation over the project is life span is 2.5%. Bright Inc. pays an income tax at 30% payable 1 year in arrears. The project qualifies for a capital cost allowance of 33.3% per year on a straight line basis.
Required
a) Calculate the following values for the investment proposal
i. Net Present Value (NPV)
ii. Internal rate of return (IRR)
b) Briefly explain your findings and advice management of the firm whether the proposal is financially viable or not.
c) Assume the stock market is semi-strong efficient what will be the implication for the firm's stock price if Bright Inc. pursues the project

Answer rating: 100% (QA)

a i Net Present Value NPV Year Cash Inflow Cash Outflow Net Cash FlowDiscount FactorDiscounted Cash ... View the full answer