Question 1. Part 1 Happy Home is considering introducing a new set of living room sofa ("Combi Fabric Corner) to complement Its existing product line. You are the Chief Financial Officer of Happy Home and are tasked to evaluate the feasibility of this project The projected revenues and costs associated with this investment are as follows: 1. After a market research coating the firm 10,000, a veling price of 5,000 per set of sofas has been agreed. Variable production costs will amount to 45 percent of the filling price, and fixed costs are 1 million per year 2 Sales will be 2,000, 2.500, 3,000, 2,000 and 1,800 sofa sets per year for yearst 1, 2, 3, 4 and 5 respectively. A new range of product will replace this sota set at the end of the 5 yeur, 3. One area of concern is that the selling of the new sofas wil reduce the company's existing traditional dining table product ("Royal Oak). It be estimated that sale of "Royal Oak" will go down from 10.000 units per year to 9,000 units per year. The Royal Oak sols for 2,000 per unit and has a variable production cost amounting to 40 percent of the selling prio Page 4 of 8 ECON54615-WE01 4 To produce the sofas, the company needs to make an initial investment of 10 million in equipment The equipment is deprecated to zero book value over the 5-year period using the straight-ine method. At the end of the 5th year, the equipment will be sold at a market price of C2 millon 5. Changes in working capital requirements Cash increases by 5% of the change in sales inventory Increases by 5% of the change in sales, trade receivables increase by 5% of the change in sales and trade payables increase by 5% of the change in variable production costs. These working capital requirements are company level policies and are applicable to both the sofa sets and the dining tables Working capital will be required at the end of year 1 and will be relented inter 6. Al revenues and expenses are paid in cand in the year they inox or 7. The corporate tax rate in 40 percent & The project has a bota of 1.5, the risk tro fute 3% and the market riak prensium 60% Requirements Calculate the Net Present Value and the Payback Parod of this project 100 m b. Advise the Chief Executive Officer of Happy Home on whether the company should undertake this Investment in your www, you may want to comment on the fall of the project and other factors that may whence the decision [10 marts 110 marks] Part 2 "Over the last 15 years, 94% of corporate profits have gone to shareholders in the form of buybacks and dividends, instead of to workers and their families. The practice of corporate stock buybacks does not just drive inequality --it drains resources for investment in workers, research and development, and the long- term growth of companies." 1 Critically discuss these statements. 125 marks) 1