Question 1

In order to be more efficient and profitable a Dublin base Medtech company is considering investing in new manufacturing equipment. This equipment will require a large initial outlay and but will generate cash inflows over its four-year useful life. The company commissioned a report by management consultants, half paid for by Enterprise Ireland, at a cost of 150,000. This report forecast the following information on the equipment.

• An initial investment in working capital of 160,000 is required. At the end of the four-year period this will be recovered.
• Annual cash savings onlabour are expected to amount to 100,000 per annum during the four-year period.
• Overheads associated only with this new equipment is estimated at 300,000 a year.
• Sales resulted from this new equipment is expected to be 800,000 per annum in year 1 and will grow at 3% per annum thereafter.
• The company has a weighted average cost of capital of 10%.
• The equipment will cost 1,500,000. It can be sold after four years for 800,000.
• The managing director of the company has indicated that 500,000 of existing head office costs will be allocated to the new machinery.
• The new equipment needs to be serviced at the end of year two, costing 200,000.
• Two more staff need to be hired to operate the machinery, with an annual salary of 40,000 each person.

Required:

1. Highlight the irrelevant information in this report, and explain why it is not relevant in appraising this investment

(2 marks)

1. Calculate the NPV of the proposed project, and advise the company whether or not they should invest in the new equipment. Present your results in a tabular form as follows:

(15 marks)

1. Calculate the sensitivity of the project the cost of equipment at a WACC of 10%. Also, calculate if the company's cost of capital were to rise to 15%. Does this change your recommendation?

(8 marks)