Question 3 (20 marks) Spring Ltd is a small company that specializes in the production of...

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Question 3 (20 marks) Spring Ltd is a small company that specializes in the production of soft drinks. To maintain its competitiveness and explore new investment opportunity, it had spent $45,000 in conducting a market survey to explore the development of a new product for the healthy drink market. Followings are the information gathered and learnt from this market survey. The machinery's invoice price would be $2,100,000 and the physical life is 5 years and the residual book value will be $100,000 at the end of the 5th year. The depreciation is calculated based on a straight-line basis. Spring plans to operate the project for 3 years and the machinery will be disposed and the expected sale proceed will be $120,000 by that time. Production and units sold during the 3 years of the project life is expected to be as follows: 90,000 units in year one, 120,000 units in year two, and 140,000 units in year three. The unit price is $20 for year one and increase at 5% per year. The production and operation cost (excluding depreciation per unit for the first year is $10 and will increase at 10% per year. The required investment in net operating working capital at the beginning of the project is $30,000. The corporate tax is 20 and the cost of capital is estimated to be 10%. Please answer the following questions: a. Determine the project free cash flows and calculate the NPV (9 marks) b. As the healthy drink market is highly competitive, the financial manager and the market manager together estimate the annual cash inflow has a 30% chance lower by $250,000 in the worst scenario and a 30% chance higher by $250,000 in the best scenario. Calculate the expected NPV and the standard deviation. (6 marks) c. Spring's average project has a coefficient of variation within the range from 1.5-1.8. How would you change your calculation in part a) then? Please briefly state your steps of the calculation revision and explain whether and how your recommendation of the project changes (No calculation needed). (5 marks) Question 3 (20 marks) Spring Ltd is a small company that specializes in the production of soft drinks. To maintain its competitiveness and explore new investment opportunity, it had spent $45,000 in conducting a market survey to explore the development of a new product for the healthy drink market. Followings are the information gathered and learnt from this market survey. The machinery's invoice price would be $2,100,000 and the physical life is 5 years and the residual book value will be $100,000 at the end of the 5th year. The depreciation is calculated based on a straight-line basis. Spring plans to operate the project for 3 years and the machinery will be disposed and the expected sale proceed will be $120,000 by that time. Production and units sold during the 3 years of the project life is expected to be as follows: 90,000 units in year one, 120,000 units in year two, and 140,000 units in year three. The unit price is $20 for year one and increase at 5% per year. The production and operation cost (excluding depreciation per unit for the first year is $10 and will increase at 10% per year. The required investment in net operating working capital at the beginning of the project is $30,000. The corporate tax is 20 and the cost of capital is estimated to be 10%. Please answer the following questions: a. Determine the project free cash flows and calculate the NPV (9 marks) b. As the healthy drink market is highly competitive, the financial manager and the market manager together estimate the annual cash inflow has a 30% chance lower by $250,000 in the worst scenario and a 30% chance higher by $250,000 in the best scenario. Calculate the expected NPV and the standard deviation. (6 marks) c. Spring's average project has a coefficient of variation within the range from 1.5-1.8. How would you change your calculation in part a) then? Please briefly state your steps of the calculation revision and explain whether and how your recommendation of the project changes (No calculation needed). (5 marks)