50.1K

Verified Solution

Link Copied!

Question 2 (16 marks) Fleur Corporation is considering a new three-year project that requires an initial fixed investment of $3,600,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project requires an initial investment in net working capital of $300,000 which will be recovered at the end of the project's life. It is estimated to generate $2,900,000 in annual sales, with costs of $1,960,000. The company has already spent $150,000 for a marketing survey to determine the viability of the new project. The tax rate is 17 percent. a. Explain whether the company should include the cost of marketing survey $150,000 into the consideration of the new project. ( 2 marks) b. Copy the following table to your answer sheet and fill in all the blanks. (6 marks) c. Suppose the required return on the project is 15 percent. What is the net present value (NPV) of the project? Explain whether the company should accept this project. (4 marks) d. State the rule of the internal rate of return (IRR). Although the NPV and IRR rules often lead to the same accept-reject decisions, they sometimes conflict. Name two situations in which they conflict. (2 marks) e. The company doubts the estimation of annual sales in the above analysis, but it is quite sure about all other estimates. It would like to carry out a scenario analysis or sensitivity analysis to determine the effects of errors in annual sales on NPV. Explain which analysis the company should use. (2 marks)

Answer & Explanation Solved by verified expert

See Answer