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Font Paragraph Styles Dictate Sensitivity Sily Ltd is evaluating a number of capital investment opportunities. Two of projects are shown below. PB P9 Projects: Selling price per unit 30 40 Variable cost per unit 5 10 Fixed costs per year 20,000 30,000 P9-Units Expected sales: Year #1 Year #2 Year #3 Year #4 Year #5 P8- Units 3,000 4,000 3,000 2,000 1,700 2,000 2,000 2,000 2,000 2,000 Further information: Project P8: Project P8 will require an initial investment of 200,000. The investment assets are expected to have a residual value of 10,000 at the end of the projects 5 year life-cycle Project P9 Project P9 will require an initial investment of 110,000. The investment assets of this project will have no residual value after 5 years. Depreciation: All project assets acquired will be subject to depreciation using the straight line method. Working capital The working capital investment requirements for the two projects are: The initial working capital investment for project P8 is 20,000. There will be no increase to this value P9 The working capital investment for project PB is 10,000. This will rise to 15,000 during the project's second year All working capital investment will be returned back to cash at the end of the projects 5-year time horizons. PB: 93% 979 P W inser A A Font Paragraph Styles Dictate Sensitivity Discount factor 10% Present values Project NPV Project P9 0 1 2 3 4 5 DCF - NPV P9 Investment Working capital Operating cash flows Residual value Net cash flows Discount factor 7% Present values Project NPV Discount factor 10% Present values Project NPV Calculate the internal rate of return (IRR) for the two projects (10% for negative NPV) To max 4 marks Project P8 (2 marks): ) ( % - %)) = % Project p9 (2 marks): % + 10 ) ( % %)) % + + 9) I d. Make a recommendation (with supporting reasons) on the most appropriate project for the executive management of Six Ltd (1 mark per valid point made to max 4 marks) e 11 of 11 Focus 7 + 93% Tell me Share Comments Draw Design Insert Layout A A Q Dictate Font Styles Sensitivity Paragraph WORS Establish cash inflows using (Units sold x unit contribution) less period fixed costs Establish cash flow PS E PO E h Year #1 Year 2 Year 3 Year 4 Year 85 Total: a. Calculate the account ting rate of return (ARR) for the two projects - To max 4 marks PS P9 ARR A Cash inflows B/d B Less depreciation (investment less residual value) C Profits (A-B) D Average profits (C/5) E Average Investment investment + residual value)/2) FARR (DE) b. Establish the net present values (using a discounted cash flow method) of two parts - To max 8 marks Project PB 0 1 2 3 4 5 DCF - NPV PS Investment Working capital Operating cash flows Residual value Net cash flows Discount factor 7% Present values Project NPV 10 Page 10 of 11 Focus 93% C