Answer To: Charles Sturt University Subject Outline ACC XXXXXXXXXXS I-9 February 2018-Version 1 Page of 1 22...
Shakeel answered on May 09 2020
PART A
Year 0
year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Initial investment
($33,250,000)
Sales
$30,000,000
$33,000,000
$36,300,000
$39,930,000
$43,923,000
$48,315,300
$53,146,830
$58,461,513
$64,307,664
$70,738,431
Margin after conversion (MAC) @ 30%
$9,000,000
$9,900,000
$10,890,000
$11,979,000
$13,176,900
$14,494,590
$15,944,049
$17,538,454
$19,292,299
$21,221,529
Less: Depreciation per year
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
Profit before tax (PBT)
$5,930,000
$6,830,000
$7,820,000
$8,909,000
$10,106,900
$11,424,590
$12,874,049
$14,468,454
$16,222,299
$18,151,529
Tax @ 30%
$1,779,000
$2,049,000
$2,346,000
$2,672,700
$3,032,070
$3,427,377
$3,862,215
$4,340,536
$4,866,690
$5,445,459
Profit after tax (PAT)
$4,151,000
$4,781,000
$5,474,000
$6,236,300
$7,074,830
$7,997,213
$9,011,834
$10,127,918
$11,355,610
$12,706,070
Add: Depreciation
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
$3,070,000
Add: Incentive in the form of rebate
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
Net cash flow
($33,250,000)
$7,721,000
$8,351,000
$9,044,000
$9,806,300
$10,644,830
$11,567,213
$12,581,834
$13,697,918
$14,925,610
$16,276,070
PVIF @ 22%
1
0.8197
0.6719
0.5507
0.4514
0.3700
0.3033
0.2486
0.2038
0.1670
0.1369
PV of cash flow @ 22%
($33,250,000)
$6,328,689
$5,610,723
$4,980,593
$4,426,555
$3,938,579
$3,508,082
$3,127,700
$2,791,103
$2,492,835
$2,228,185
Year 0
year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
After tax cash flows
($33,250,000)
$4,151,000
$4,781,000
$5,474,000
$6,236,300
$7,074,830
$7,997,213
$9,011,834
$10,127,918
$11,355,610
$12,706,070
NPV = ($33,250,000) + $6,328,689 + $5,610,723 + $4,980,593 + $4,426,555 + $3,938,579 + $3,508,082 + $3,127,700 + $2,791,103 + $2,492,835 + $2,228,185
= $6,183,045
Profitability index (PI) = ($6,328,689 + $5,610,723 + $4,980,593 + $4,426,555 + $3,938,579 + $3,508,082 + $3,127,700 + $2,791,103 + $2,492,835 +
$2,228,185) / $33,250,000
= $39,433,045 / 33,250,000 = 1.19
Cumulative net cash flow
($33,250,000)
($25,529,000)
($17,178,000)
($8,134,000)
$1,672,300
$12,317,130
$23,884,343
$36,466,177
$50,164,095
$65,089,705
$81,365,775
Payback period = 3 + 8,134,000 / 9,806,300
= 3.83 years.
What recommendation would you make regarding the projects? Discuss any further information that you may require to help you make the accept/reject decision about either of these projects (5 marks)
NPV is positive, therefore project should be accepted. Profitability Index (PI) is larger than 1, thus project should be accepted. The payback period is less than the useful life of the project i.e. 10 years. Thus, it also suggests that project should be accepted.
The other relevant information that might be helpful for acceptance/rejection of project are as follows:
· Opportunity cost if any
· Expected inflation or interest rate so the discounting factor may better be anticipated for future period.
· Competitor’s sales and marketing strategy so expected cash flows are better anticipated in competitive environment.
· Any other relevant information pertaining to fixed costs or initial investment for project.
Define ‘product cannibalisation’ in capital budgeting decisions and address Nathan’s concerns that it should be considered (5 marks).
Product cannibalization means introduction of more than one product in the market by the same firm and those...