Question 2

You are a financial analyst for NO LUCK Co and you are required to assess two mutually exclusive investment projects for a manufacturing client. The clients estimated cost of capital is 12%. The first project involves investing 30mil in equipment which has a life of 20 years and a final scrap value of 2mil. The equipment will be used to produce 120.000 of new technology boilers per annum, generating a contribution of 65 per unit. The estimated annual fixed costs are 3,5mil per annum. The second project involves investing 10mil to upgrade the existing equipment. The investment horizon of the upgrade is 20 years. The scrap value of the upgrade is 15.000. This upgrade will increase current production by 50.000, generating a contribution of 35 per unit. The estimated annual fixed costs are 10.000 per annum. Ignore taxation.

Requirements

1. Determine, based on the net present value (NPV) investment appraisal technique, which of the two projects is best for your client

2. Calculate what percentage changes in the following factors for the two projects would cause your decision in (1) to change and comment on your results.

a. Initial investment

b. Sales volume

c. Fixed costs

d. Scrap value

3. Discuss the advantages of NPV.