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You have been asked by the financial manager of your company to evaluate a proposal for marketing a new product using different investment evaluation methods. The project requires an investment of ?15m in plant and machinery. Annual forecasts for sales, cost of goods sold, other costs and changes in working capital are given in the Excel file . Profits are taxed at 30 percent and the discount rate is 23%. Forecasts and the discount rate have all been estimated assuming the same inflation rate. The financial manager would like the initial cash flow analysis to be carried out based on two alternative assumptions regarding the salvage value of the plant and equipment in year 7.
Also, as there is uncertainty about the accuracy of the forecasts he would like you to carry out an analysis incorporating the risk by considering the probability distribution of the net present values. The probability distributions used to summarize the annual net cash flows are also given in the ?DATA? worksheet. The annual risk free rate is assumed to be 10 percent and annual cash flows are assumed independent over time.
Finally there is an opportunity for the company to use the capital on an alternative project with the same duration and with a present value distribution, which has a mean of ?24,270,000 and standard deviation of 5,708,000. You would also need to consider and compare the relative risk of the project with the alternative and make recommendations. You have been asked by the financial manager of your company to evaluate a proposal for marketing a new product using different investment evaluation methods. The project requires an investment of ?15m in plant and machinery. Annual forecasts for sales, cost of goods sold, other costs and changes in working capital are given in the Excel file . Profits are taxed at 30 percent and the discount rate is 23%. Forecasts and the discount rate have all been estimated assuming the same inflation rate. The financial manager would like the initial cash flow analysis to be carried out based on two alternative assumptions regarding the salvage value of the plant and equipment in year 7.
Also, as there is uncertainty about the accuracy of the forecasts he would like you to carry out an analysis incorporating the risk by considering the probability distribution of the net present values. The probability distributions used to summarize the annual net cash flows are also given in the ?DATA? worksheet. The annual risk free rate is assumed to be 10 percent and annual cash flows are assumed independent over time.
Finally there is an opportunity for the company to use the capital on an alternative project with the same duration and with a present value distribution, which has a mean of ?24,270,000 and standard deviation of 5,708,000. You would also need to consider and compare the relative risk of the project with the alternative and make recommendations.
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