Pamela McLennan, the chief financial officer in Glaxo Kent Ltd. (GKL), is responsible for the company's...
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Pamela McLennan, the chief financial officer in Glaxo Kent Ltd. (GKL), is responsible for the company's project evaluation. One of the projects under consideration is the company's expansion project, which requires $5 million over 6 years. The expenditure can be broken down as the follows: $125,000 spending on site preparation and plant design at the start of the project; $1.5 million on building and equipment by the end of year 1, and another $1 million by the end of year 2. The training and testing programs will start in year 3. and budget for four years. The specific amounts are shown in the table below. The project will reduce their operating costs by $405,000 at the end of year 2, and by $850,000 in each of the following years thereafter. Year Expenditure Revenue 0 125 1 1.500 3 2 1,000 175 405 4 5 6 75 75 850 850 850 850 75 All values in in $1000. The company requires that all projects are evaluated based on a 15% internal rate of return (equivalent to interest rate), and a 6 year time period. 4 (a) If you were the chief financial analyst working for the parent company, would you approve the project? Explain your answer using a net present value analysis. (b) Your conclusion made in part a) is based on a 6-year term. Would your conclusion change if the time horizon were expanded, say, to a 7-year term? (Assume revenue of $850,000 in year 7.) Pamela McLennan, the chief financial officer in Glaxo Kent Ltd. (GKL), is responsible for the company's project evaluation. One of the projects under consideration is the company's expansion project, which requires $5 million over 6 years. The expenditure can be broken down as the follows: $125,000 spending on site preparation and plant design at the start of the project; $1.5 million on building and equipment by the end of year 1, and another $1 million by the end of year 2. The training and testing programs will start in year 3. and budget for four years. The specific amounts are shown in the table below. The project will reduce their operating costs by $405,000 at the end of year 2, and by $850,000 in each of the following years thereafter. Year Expenditure Revenue 0 125 1 1.500 3 2 1,000 175 405 4 5 6 75 75 850 850 850 850 75 All values in in $1000. The company requires that all projects are evaluated based on a 15% internal rate of return (equivalent to interest rate), and a 6 year time period. 4 (a) If you were the chief financial analyst working for the parent company, would you approve the project? Explain your answer using a net present value analysis. (b) Your conclusion made in part a) is based on a 6-year term. Would your conclusion change if the time horizon were expanded, say, to a 7-year term? (Assume revenue of $850,000 in year 7.)
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To evaluate the expansion project for Glaxo Kent Ltd GKL well perform a net present value NPV analys... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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