Question 1 (25 Marks] Eggs Lid is considering purchasing a machine to pasteunze eggs to supplement their fresh eggs The company has already looked into the costs of the project, such as the purchase of a building for the process and related equipment At this point, ther opinion is that the costs nvolved seem reasonable when compared to the expected profits However, no detailed analysis has been made yet and you have been tasked with evaluating the proposed project and the report to management Further information The project has an intial expected life of five years All assets are depreciated by way of the straight-line method over a period of five years The company's subjected to a tax rate of 28% The company has a weighted average cost of capital (WACC) of 8% The company agusts its WACC as follows when evaluating projects If the coefficient of vanation (CV) of the cash flows from sales are below 0.75, no adjustment needs to be made if it is above 0,75 but below 1,1 multiply the WACC by 1.25 If it is above 1.1 multiply by WACC by 15 The annual cash flows from sales for the machine has the followng probability distribution Cash flow Probability R 500 000 0 10 R1 000 000 020 R 1 100 000 060 R 2 000 000 010 Cost of building R 1000 000 Cost of machine R 1500 000 Installation cost of machine R 500 000 Net operating working capital requirement for new machine R 500 000 Res dual value of machine R200 000 Resdual value of bulding R 1000 000 Expected sales as to be calculated above will stay the same over the life of the project Cost of sales are equal to 30% of expected sales Fixed costs are expected to be as follows Year 1 2 3 5 Fixed costs R 100 000 R 110 000 R 105 000 R 120 000 R 130 000 Required: a) Calculate the expected cash flow from sales (2) b) Calculate the coefficient of variation (CV) of the expected cash flows c) Determine the discount rate to be used (1) d) Calculate the net present value (NPV) of the project, clearly showing your cash flows in a table (13) ITURN OVER] 3 FIN4801 MAY/JUNE 2018 e) Provide a recommendation to Eggs Ltd regarding whether or not the company should undertake the project Justify all of your arguments in a brief (max half a page) report on the expected profitability of the project (5) Question 1 (25 Marks] Eggs Lid is considering purchasing a machine to pasteunze eggs to supplement their fresh eggs The company has already looked into the costs of the project, such as the purchase of a building for the process and related equipment At this point, ther opinion is that the costs nvolved seem reasonable when compared to the expected profits However, no detailed analysis has been made yet and you have been tasked with evaluating the proposed project and the report to management Further information The project has an intial expected life of five years All assets are depreciated by way of the straight-line method over a period of five years The company's subjected to a tax rate of 28% The company has a weighted average cost of capital (WACC) of 8% The company agusts its WACC as follows when evaluating projects If the coefficient of vanation (CV) of the cash flows from sales are below 0.75, no adjustment needs to be made if it is above 0,75 but below 1,1 multiply the WACC by 1.25 If it is above 1.1 multiply by WACC by 15 The annual cash flows from sales for the machine has the followng probability distribution Cash flow Probability R 500 000 0 10 R1 000 000 020 R 1 100 000 060 R 2 000 000 010 Cost of building R 1000 000 Cost of machine R 1500 000 Installation cost of machine R 500 000 Net operating working capital requirement for new machine R 500 000 Res dual value of machine R200 000 Resdual value of bulding R 1000 000 Expected sales as to be calculated above will stay the same over the life of the project Cost of sales are equal to 30% of expected sales Fixed costs are expected to be as follows Year 1 2 3 5 Fixed costs R 100 000 R 110 000 R 105 000 R 120 000 R 130 000 Required: a) Calculate the expected cash flow from sales (2) b) Calculate the coefficient of variation (CV) of the expected cash flows c) Determine the discount rate to be used (1) d) Calculate the net present value (NPV) of the project, clearly showing your cash flows in a table (13) ITURN OVER] 3 FIN4801 MAY/JUNE 2018 e) Provide a recommendation to Eggs Ltd regarding whether or not the company should undertake the project Justify all of your arguments in a brief (max half a page) report on the expected profitability of the project