: Investment Decision $-$ project evaluation $($using Excel$)(10$ marks$)$

SYdMel PIA Ltd manufactures a variety of snacks. The company is considering introducing a new product. The

company$$s manager has been provided with the following information by their business analyst.

$$ An environmental impact study has been undertaken at a cost of $$700,000.$ This indicates that the

project is environmentally sustainable, but the project still needs to be evaluated to see if it is

economically viable.

$$ The project will require the use of storage capacity owned by the company. If not used for the project,

this could be rented out for $$109,000$ per year.

$$ The project will generate waste products which can be used by another of the firm$$s operations,

saving that operation $$88,000$ per year in raw material purchases.

$$ The project has an anticipated economic life of $10$ years.

$$ The Company plans to spend $$2,300,000$ on advertising campaign to boost sales.

$$ The Company$$s interest expense each year will be $$1,280,000.$

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$$ The Company is required to purchase a new machine to produce the new product. The machine$$s

initial cost is $$12,700,000.$ The machine will be depreciated on a straight $$ line basis over $6$ years. The

Company anticipates that the machine will last for $15$ years; the salvage value after $10$ years is

$$1,200,000.$

$$ Six months ago, the Company also paid $$870,000$ to a firm to do research regarding new product.

$$ If the Company goes ahead with the new product, it will influence on the Company$$s net operating

capital. The forecasted net working capital will be $$1,000,000($at time zero$)$

$$ The new product is expected to generate sales revenue of $$3,800,000$; $$5,700,000$; $$6,800,000$;

$$8,800,000$; $$10,600,000$; $10,500,000$; $9,600\mathrm{.}000,9,600,000,8\mathrm{.}600\mathrm{.}000$ and $8,580,000$ from years $1$

to $10,$ respectively. Each year the operating cost $($not including depreciation$)$ expected to equal $30$

percent of sales revenue.

$$ In addition, the Company expects with introduction of new product, sale of other snacks products

increases by $$1,290,000$ after taxes each year.

$$ The Company$$s overall WACC is $10\mathrm{.}9\%.$ However, the proposed project is riskier than the average

project; the new project$$s WACC is estimated to be $9\mathrm{.}5\%$

$$ The Company$$s tax rate is $27\mathrm{.}5\%($being a base rate entity$).$

Required:

i$.$ Calculate the net present value, internal rate of return, discounted payback, and profitability index of

the proposed project. Based on your analysis should the project be accepted?

ii$.$ Conduct a sensitivity analysis if $($i$)$ Each year the operating cost $($not including depreciation$)$ expected

to equal $25$ percent of sales revenue; $($II$)$ project$$s WACC is estimated to be $7\mathrm{.}55\%$ and $($iii$)$ Company$$s

tax rate is $30\%($being a non$-$base rate entity$).$