The tasks involve assessing the viability of the project by analysing the risk and reward. Your organisation is conside

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The tasks involve assessing the viability of the project by
analysing the risk and reward. Your organisation is
considering investing in an environmentally friendly wood chipping
project. The project will take six years to complete and require
the purchase of a new woodchip furnace costing $6,000,000. The
installation cost of the new furnace is expected to cost $100,000.
Estimates prepared by the company show sales of 50,000 tonnes in
year 1 and are expected to grow at the rate of 20% per annum
thereafter. Expected selling price is $40 per tonne, and the
variable costs are expected to remain constant at $15 per tonne.
Fixed costs are expected to remain at $45,000 per annum. Revenue
and expense forecasts for the project are presented below. The
project will require the organisation to make an initial investment
of $20,000 in working capital. Working capital is predicted to
increase by 20% each year. Annual total investment in working
capital will be equal to 15% of the projected sales revenue. The
company can depreciate its woodchip furnace on a straight-line
basis over six years. The project has an estimated salvage value at
the end of six years of $50,000. The company’s overall cost of
capital is 12%, the annual inflation rate for the next six years is
estimated at 2% and the company is subject to a 30% corporate
income tax rate. Assume the company’s cost of capital is 13%,
annual inflation for years 1-6 is 3%, and the corporate income tax
rate is 30%.
Required:
A) Determine the initial cash outlay associated with the
proposed investment decision.
B) Calculate the annual operating net cash inflows for years 1
to 6 associated with the proposed investment assuming working
capital investment remains constant at $20,000.
C) Calculate the terminal cash flow associated with the proposed
investment decision.
D) Calculate the total free cash flows for each year associated
with the purchase.
E) Discuss the likely risks associated with the acquisition of
the furnace that you need to consider. Describe the steps you would
take to evaluate and mitigate such risks.
F) Make recommendation to the management on whether to acquire
the furnace. Would you recommend the company to undertake this
project? Justify your decision. Discuss what other qualitative and
quantitative factors should be taken into consideration.
G) Assuming the company is a proprietary limited company founded
20 years ago, suggest how best to finance this new project.
Consider a few appropriate alternative sources of finance and
compare and contrast them.