Individual Assignment $1(20\%)$

BM$/$JUN $2024/$FIN$537$

QUESTION $2$

a$).$ The Financial Manager of Tumex Bhd$.$ has obtained the following information regarding a project of the firm:

$\backslash$table$[[$Unit sales,$10,000],[$Product price per unit,RM$200],[$Variable cost per unit,RM$70],[$Fixed cost per year,RM$500,000],[$Initial investment,RM$1,500,000],[$Life of project,$6$ years$]]$

The Financial Manager predicts that the unit sales and the price will increase by $10\%$ in a boom period and drop by $10\%$ in a recession period. The reverse scenario applies for variable cost and fixed cost, that is$,$ the costs will drop by $10\%$ in a boom period and vice versa. The firm's tax rate is $28\%$ and the project's required rate of return is $15\%.$ Calculate:

i$)$ The base case, upper bound and lower bound of the project,

$(4$ marks$)$

ii$)$ The base case, best case and worst case NPV of the project.

$(9$ marks$)$

iii$).$ The sensitivity of NPV towards unit price

$(5$ marks$)$

b$)$ Explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B$,$ is it true that Firm A will also have a higher cost of equity capital? Explain.

$(7$ marks$)$