Caratax Ltd is a manufacturing company. The Financial Manger has come up with the following figures that relate to a protective clothing project that the organization intends undertaking. Please note that the tax for the company is 40%. Investment outlay(PPE) P30000000, 

Direct materials cost per set P 40, 

Direct labor cost per set P8/hr.(2.5 hours per set),

 Overhead expenses P12000000, 

Selling price per set P380.

Targeted demand 240000 set

a) These initial figures are for one year. Finance department has estimated the appropriate required rat on projects of similar risks to be 18%. 

i) Calculate NPV of the project and comment on whether the project should be undertaken

ii) Would the decision change as result of changes in the following variables ( Show calculations)

        -  Hourly wage rate increased by 20%

        -  Investment outlay is underestimated by 10%

        -  Price per set is underestimated by 5%

        -  Targeted demand is over estimated by 15%

b) The equipment will have 5 year life and depreciation will be straight-line to zero throughout the life of the project. The equipotent will have a zero salvage value. The initial figures will be the same throughout the life of the project. The required rate of return is still 18% and tax rate is 40% 

i) Calculate the base case operating cash flow and the base case NPV

ii) Calculate the new NPV if demand increases/decreases by 10%, others held constant

iii) Calculate the new NPV if price per set increases/decreases by 10%, others held constant

iv) Comment on the sensitivity of the NPV to changes in demand and price per set

c) Explain the purpose of capital investment appraisal?

d) Compare the payback period and accounting rate of return methods of capital investment appraisal?

e) Discuss the main stages involved in debt collection?

f) Explain the following terms: market order, limit order, short sell and stop-loss order?

Answer rating: 100% (QA)

a i To calculate the net present value NPV of the project we need to determine the cash flows associated with the project and discount them to the present value using the required rate of return The c... View the full answer