Question 2

DEF Ltd. is evaluating a new venture with an initial investment of $1.2 million. Additional investments of $100,000 will be required at the end of the third and fifth years. The venture will generate annual sales revenue of $600,000, with operating costs of $300,000 per year. The project life is 8 years, after which the equipment will be sold for $150,000. Working capital of $40,000 will be required and released at the end of the project. The company uses a tax rate of 20% and a discount rate of 8%.

Requirements:

1. Calculate the NPV of the project.
2. Determine the IRR of the project.
3. Compute the payback period.
4. Evaluate the impact of an increase in operating costs by 10% on the NPV.
5. Suggest if the project is financially viable.