QUESTION Imbwili Co, a medium-sized company specialising in the manufacture and distribution of equipment for babies and
Posted: Sun Jun 05, 2022 5:01 pm
QUESTION Imbwili Co, a medium-sized company specialising in the
manufacture and distribution of equipment for babies and small
children, is evaluating a new capital expenditure project. In a
joint venture with another separate company, it has invented a
remote-controlled pushchair, one of the first of its kind on the
market. It has been unable to obtain a patent for the invention,
but is sure that it will monopolise the market for the first three
years. After this, it expects to be faced with stiff competition.
The details are set out below. 1. The project has an immediate cost
of K2,100,000. 2. Sales are expected to be K1,550,000 per annum for
years 1 to 3, falling to K650,000 per annum for the two years after
that. No further sales of the product are expected after the end of
this five-year period. 3. Cost of sales is 40% of sales. 4.
Distribution costs represent 10% of sales. 5. 20% of net profits
are payable to the joint venture partner the year after the profits
are earned. 6. The company's cost of capital is 5%. Required a)
Calculate the net present value of the project at the company's
required rate of return. Conclude whether the project is
financially viable. (10 marks) b) Calculate the project's internal
rate of return (IRR) to the nearest percent. (5 marks) c) Calculate
the project's simple payback period. Assume all cash flows arise at
the end of the year apart from the immediate investment costs. (5
marks) [Total: 20 Marks]
manufacture and distribution of equipment for babies and small
children, is evaluating a new capital expenditure project. In a
joint venture with another separate company, it has invented a
remote-controlled pushchair, one of the first of its kind on the
market. It has been unable to obtain a patent for the invention,
but is sure that it will monopolise the market for the first three
years. After this, it expects to be faced with stiff competition.
The details are set out below. 1. The project has an immediate cost
of K2,100,000. 2. Sales are expected to be K1,550,000 per annum for
years 1 to 3, falling to K650,000 per annum for the two years after
that. No further sales of the product are expected after the end of
this five-year period. 3. Cost of sales is 40% of sales. 4.
Distribution costs represent 10% of sales. 5. 20% of net profits
are payable to the joint venture partner the year after the profits
are earned. 6. The company's cost of capital is 5%. Required a)
Calculate the net present value of the project at the company's
required rate of return. Conclude whether the project is
financially viable. (10 marks) b) Calculate the project's internal
rate of return (IRR) to the nearest percent. (5 marks) c) Calculate
the project's simple payback period. Assume all cash flows arise at
the end of the year apart from the immediate investment costs. (5
marks) [Total: 20 Marks]