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Question 2 25 Marks Kavango Ltd is considering investing in a project at a cost of...

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Finance

Question 2 25 Marks
Kavango Ltd is considering investing in a project at a cost of N$3000 000. The estimated economic life of the project is 5 years. Thecompany will use the straight-line method to depreciate the cost ofthe project over 5 years. The company estimates that sales willamount to 240 000 units per year at an estimated selling price ofN$40 per unit. The company expects to incur fixed overheads,excluding depreciation of N$300 000 per year and variable cost perunit isN$30. The company cost of capital is 11% and the corporatetax rate is 28%. The expected residual value of the project in 5years’ time is expected to be zero.
Required:
a) Use the sensitivity analysis to determine what the NPV of theproject would be if selling price, sales volume, and variable costper unit are increased or reduced by 10%.

b) Use break-even analysis to determine the minimum sales volumethat the company is required to achieve to break-even in terms ofNPV.

Answer & Explanation Solved by verified expert
4.4 Ratings (716 Votes)
aOperating cash flow OCF of each year income after tax depreciationdepreciation each year initial cost project life 3000000 5    See Answer
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