Bulla Dairy Foods is considering buying a new production line which is forecasted to start earning $3,400,000 of revenue

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Bulla Dairy Foods Is Considering Buying A New Production Line Which Is Forecasted To Start Earning 3 400 000 Of Revenue 1 (143.77 KiB) Viewed 34 times

Bulla Dairy Foods is considering buying a new production line which is forecasted to start earning $3,400,000 of revenue in the second year of operation and these revenues are expected to increase by 20% annually. The operating costs are 30% of annual revenue. The production line is kept for 3 years of revenue, after which it is expected to be sold for $500,000. Setting up the production line requires $3,500,000 today and $2,500,000 in the first year. 60% of the fund for the project is financed through debt which has a cost of 7% per annum and shareholders require an additional 5% per annum on what debt holders earn. a) Draw the timeline and set out the cash inflow, cash outflow and net cashflow for each year. (4 marks) b) Calculate the required rate of return of this project. (3 marks) c) Calculate the Net Present Value (NPV) of this project and explain if this project should be accepted according to the NPV rule (4 marks) d) Given your answer to part c), without calculation, identify which one of the following statements is likely to be true. Explain why. (4 marks) • Internal rate of return > WACC • Internal rate of return < WACC • Payback period > cut-off point Payback period <cut-off point . .