Question 3 a) Enlightened Ltd is investigating the introduction of a new advanced solar light. Forecast revenue...

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Question 3
a) Enlightened Ltd is investigating the introduction of a newadvanced solar light. Forecast revenue from the new light is$1,250,000 per year and variable costs $450, 000 per year. Therevenue and variable costs are expected to stay constant for thefour years. The new light will require a new production line thatwill have an initial cost of $2,000,000. For tax purposes you candepreciate the full cost down to zero over the four year life ofthe project. At the end of four years you expect to be able to sellthe production machinery for $350,000. Selling the new fixtureswill require additional working capital of $25,000 startingimmediately. You expect to recover the working capital investmentat the end of the four year project. You have already spent $50,000in research and development costs to invent the new light. Assumethe tax rate is 30% and the required return is 10% APR (compoundedannually).
i) What is the annual depreciation of the new productionline?
ii) What is the annual Operating Cash Flow for the project?
iii) What are the Project Cash Flows for the project?
iv) What is the NPV for the project? What information does theNPV provide?
v) What is the payback period for the project? What informationdoes the payback period provide?
vi) Should Enlightened Ltd proceed with the new solar lightproject? Justify your answer.
b) What is sensitivity analysis and how is it used in projectevaluation?

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3.9 Ratings (509 Votes)

i Annual depreciation 20000004 500000 ii 0 1 2 3 4 Revenue 1250000 1250000 1250000 1250000 Variable costs 450000 450000 450000 450000 Depreciation 500000 500000 500000 500000 Incremental NOI 300000 300000 300000 300000 Tax at 30 90000 90000 90000 90000 NOPAT See Answer

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Question 3a) Enlightened Ltd is investigating the introduction of a newadvanced solar light. Forecast revenue from the new light is$1,250,000 per year and variable costs $450, 000 per year. Therevenue and variable costs are expected to stay constant for thefour years. The new light will require a new production line thatwill have an initial cost of $2,000,000. For tax purposes you candepreciate the full cost down to zero over the four year life ofthe project. At the end of four years you expect to be able to sellthe production machinery for $350,000. Selling the new fixtureswill require additional working capital of $25,000 startingimmediately. You expect to recover the working capital investmentat the end of the four year project. You have already spent $50,000in research and development costs to invent the new light. Assumethe tax rate is 30% and the required return is 10% APR (compoundedannually).i) What is the annual depreciation of the new productionline?ii) What is the annual Operating Cash Flow for the project?iii) What are the Project Cash Flows for the project?iv) What is the NPV for the project? What information does theNPV provide?v) What is the payback period for the project? What informationdoes the payback period provide?vi) Should Enlightened Ltd proceed with the new solar lightproject? Justify your answer.b) What is sensitivity analysis and how is it used in projectevaluation?