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QUESTION THREE

Big-Brain, a Lusaka company is considering a K9, 000,000 investment in a product called ALPHA with a life span of four years. The scrap value of the equipment used in the production of ALPHA is estimated to be K1, 500,000 at end of year four. The company has estimated production costs to be as follows:

Variable costs are K8 per unit and;

Fixed costs are K270,000 per year

The company expects to produce and sell 250,000 units per year. The estimated selling price for ALPHA is K21 per unit. Included in the fixed costs is depreciated of K15, 000 per year.

The project cost of capital is 10%.

Required:

Find the relevant cash flows for years zero through four

Calculate the NPV of the project and advise whether the investment is financially viable.

Calculate the payback period and discounted payback period

Calculate the PI and the ARR for the project

Calculate the Internal Rate of Return (IRR) of the project and advise whether the investment is financially viable.

QUESTION FOUR

In order to determine the ability of a project to meet its debt obligations, it is important to forecast the project cash flows. Explain why it is important to carry out a cash flow analysis in project finance and the five factors that need to be considered when calculating cash flows.

Explain the two terms in relation to project finance Limited recourse and Non- recourse.

Identify three groups of potential risks to project finance and explain how you can hedge against such while managing the project.

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