Questions 1 – 4 relate to Topic 6 and below are data to be used for these questions. Show all workings. Sun Solar Ltd produces solar panels for the Australian residential market. Due to high demand...

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Answered Same DayJan 14, 2021

Answer To: Questions 1 – 4 relate to Topic 6 and below are data to be used for these questions. Show all...

Kushal answered on Jan 18 2021
160 Votes
t=0
    t=1
    t=2
    t=3
    t=4
    Growth Rate
    Initial Outlay
     -5,60,00,000
     
     
     
     
     
    Working Capital Investment
     -15,00,000
     
     
     
     
     
    Sale of Asset
     
     
     
     
     80,00,000
     
     
     
     
     
     
     
     
    Price
     
     12,000
     12,600
     13,230
     13,892
    5%
    Units Sold
     
    
5,000
     5,750
     6,613
     7,604
    15%
    Revenue
     
     6,00,00,000
     7,24,50,000
     8,74,83,375
     10,56,36,175
     
    Variable costs
     
     4,20,00,000
     5,07,15,000
     6,12,38,363
     7,39,45,323
     
    Depreciation
     
     1,20,00,000
     1,20,00,000
     1,20,00,000
     1,20,00,000
     
    Corporate Tax
     
     18,00,000
     29,20,500
     42,73,504
     59,07,256
     
    After Tax Cash Flows
     -5,75,00,000
     1,62,00,000
     1,88,14,500
     2,19,71,509
     3,37,83,597
     
    Present Value of the cash flows
     -5,75,00,000
     1,47,27,273
     1,55,49,174
     1,65,07,520
     2,30,74,651
     
    Required Rate Of Return
    10%
     
     
     
     
     
     
     
     
     
     
     
     
    Payback Period
    3.0152
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
    NPV
     $ 1,23,58,617.20
     
     
     
     
     
     
     
     
     
     
     
     
    Profitability Index
     1.21
     
     
     
     
     
     
     
     
     
     
     
     
1. Capital budgeting metrics -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
A. After tax cash flows –
Cash flows = Operating Profit - (Revenue – Variable costs - depreciation) * taxes + Depreciation
Operating profit = Revenue – Variable costs
For example year – 1,
Operating profit = 6,00,00,000 – 4,20,00,000
Cash flows = 1,80,00,000 – (6,00,00,000 – 4,20,00,000 - 1,20,00,000)* 30% + 1,20,00,000
Cash flows = 1,62,00,000
Assumption – All the salvage value of the machine will be retained and gained back at the end of the life of the project. There will not be any capital gains .
B. Payback period –
Payback period is the time when the total cash flows become zero assuming in a year all the cash flows are uniformly distributed and no discounting of the cash flows take place.
Payback Period = 3.015 years
Interpretation – in 3.015 years the total cashflwos from the project will be zero.
C. Net Present Value –
Net Present Value = Initial investment + CF1 / (1+ Discount Rate) + CF2 / (1+ Discount Rate)^2+ CF3 / (1+ Discount Rate) ^3 + CF4 / (1+ Discount Rate)^4
Discount rate = 10%
Net present Value = $ 1,23,58,617
D. Profitability Index –
Profitability Index = Sum of the present value of all the after tax cash flows / Initial Investment
= 698, 58,617 / 575,00,000
= 1.21
Q.2 Report on the findings – --- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
For a project’s accept or the reject decision depends upon the NPV, or internal rate of return or the profitability index or the payback period.
Required payback – Since the required payback of the p-roject is 3 years and our payback is just above 3 years it should not be a significant issue as far as this metric is concerned.
NPV – In the ideal world, all the projects with the Net Present Value > 0 should be accepted since it will be beneficial for the firm over the entire lifetime of the period. Our project has very high positive value and hence the project should be accepted.
Profitability Index – All the projects with the profitability index above 1 should be accepted due to the higher amount of the cash flows as compared to the investment, we should accept this project.
    
     
    t=0
    t=1
    t=2
    t=3
    t=4
    Growth Rate
    
    Initlal Outlay
     -5,60,00,000
     
     
     
     
     
    
    Working Capital Investment
     -15,00,000
     
     
     
     
     
    
    Sale of Asset
     
     
     
     
     80,00,000
     
    
     
     
     
     
     
     
     
    
    Price
     
     12,000
     ...
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