You are an investment analyst in the company that is considering the new project named Arystan. Arystan
Question:
You are an investment analyst in the company that is considering the new project named “Arystan”. “Arystan” project requires an initial investment (at t=0) of $600 000. The project will generate revenue of $300 000 for the first 2 years and of $200 000 for the next 3 years. The projected cost of sales is 35% of revenues for each year. Assume there are no tax effects. Discount rate to be used in the project evaluation is 10%.
You have to go to the Investment Strategic Committee of your company and answer to the following questions (You must show all your calculations):
a) What is a Net Present Value (NPV) of “Arystan” project? (5 points)
b) Should the company undertake project or not? Justify. (2 points)
c) If cost of sales are projected to be 40% of sales, how does NPV of the project change? Should the company undertake the project “Arystan” in this case? (3 points)
International Financial Reporting and Analysis
ISBN: 978-1408075012
5th edition
Authors: David Alexander, Anne Britton, Ann Jorissen