Abbey Trading Company is considering a risky project. An initial investment of £90,000 will be followed by three years each with the following ‘most likely’ cash flows (there is no inflation or tax):

	£	£
Annual sales (volume of 100,000 units multiplied by estimated sales price of £2)		200,000
Annual costs
Labour	100,000
Material	40,000
Other	10,000 150,000	(150,000)
		50,000

The initial investment consists of £70,000 in machines, which have a zero scrap value at the end of the three-year life of the project and £20,000 in additional working capital which is recoverable at the end. The discount rate is 10%.

Required:

(1) Calculate the most-likely NPV of the project and explain what it means.

(2) Conduct a sensitivity analysis on the following four variables and explain which one of them is the most significant in affecting the profitability of the project (assuming all other variables remain constant). Show all relevant calculations and use a table to summarise the findings.

- sales price;

- labour costs;

- material costs;

- sales volume

Answer rating: 100% (QA)

1 Calculate the MostLikely NPV of the Project and Explain The Net Present Value NPV of a project represents the present value of expected future cash ... View the full answer