Suppose you are a senior financial analyst at PADICO and you are analysing the following project, where all of the dollar figures are in thousands of dollars. In year 0, the project requires an $11,350 investment in plant and equipment, which is depreciated using the straight-line method over seven years, and has a salvage value of $1,400 in year 7. The project is forecast to generate sales of 2,000 units in year 1, growing at 1.5% a year until year 5, then the growth rate declines to 0% in years 6 and 7. The cost of capital is forecast to be 11.0% in years 1-6, rising to 12.2% in years 6 and 7. The tax rate is forecast to be a constant 35.0%. Sales revenue per unit is forecast to be $9.70 in year 1 and then grow at 1% per annum. Variable cost per unit for Direct Labor, Materials, Selling Expenses, and Other Variable Costs are forecast to be $3.50, $2.00, $1.20, and $0.70, respectively, in year 1 and then grow at 1% per annum. Cash fixed costs for Lease Payment, Property Taxes, Administration, Advertising, and other cash fixed costs are forecast to be $2,800, $580, $450, $930, and $520, respectively, in year 1 and then grow at 1% per annum. The project will require working capital in the amount of $0.87 in year 0 for every unit of next year's forecasted sales and this amount will grow 1% per annum thereafter. You are required to build your detailed model in Excel to calculate the project's NPV.
Suppose you are a senior financial analyst at PADICO and you are analysing the following project, where all of the dollar figures are in thousands of dollars. In year 0, the project requires an $11,350 investment in plant and equipment, which is depreciated using the straight-line method over seven years, and has a salvage value of $1,400 in year 7. The project is forecast to generate sales of 2,000 units in year 1, growing at 1.5% a year until year 5, then the growth rate declines to 0% in years 6 and 7. The cost of capital is forecast to be 11.0% in years 1-6, rising to 12.2% in years 6 and 7. The tax rate is forecast to be a constant 35.0%. Sales revenue per unit is forecast to be $9.70 in year 1 and then grow at 1% per annum. Variable cost per unit for Direct Labor, Materials, Selling Expenses, and Other Variable Costs are forecast to be $3.50, $2.00, $1.20, and $0.70, respectively, in year 1 and then grow at 1% per annum. Cash fixed costs for Lease Payment, Property Taxes, Administration, Advertising, and other cash fixed costs are forecast to be $2,800, $580, $450, $930, and $520, respectively, in year 1 and then grow at 1% per annum. The project will require working capital in the amount of $0.87 in year 0 for every unit of next year's forecasted sales and this amount will grow 1% per annum thereafter. You are required to build your detailed model in Excel to calculate the project's NPV.
Chapter14: Capital Structure Management In Practice
Section14.A: Breakeven Analysis
Problem 8P
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Transcribed Image Text:Suppose you are a senior financial analyst at PADICO and you are analysing the following
project, where all of the dollar figures are in thousands of dollars. In year 0, the project requires
an $11,350 investment in plant and equipment, which is depreciated using the straight-line
method over seven years, and has a salvage value of $1,400 in year 7. The project is forecast to
generate sales of 2,000 units in year 1, growing at 1.5% a year until year 5, then the growth rate
declines to 0% in years 6 and 7. The cost of capital is forecast to be 11.0% in years 1-6, rising to
12.2% in years 6 and 7. The tax rate is forecast to be a constant 35.0%. Sales revenue per unit is
forecast to be $9.70 in year 1 and then grow at 1% per annum. Variable cost per unit for Direct
Labor, Materials, Selling Expenses, and Other Variable Costs are forecast to be $3.50, $2.00,
$1.20, and $0.70, respectively, in year 1 and then grow at 1% per annum. Cash fixed costs for
Lease Payment, Property Taxes, Administration, Advertising, and other cash fixed costs are
forecast to be $2,800, $580, $450, $930, and $520, respectively, in year 1 and then grow at 1%
per annum. The project will require working capital in the amount of $0.87 in year 0 for every
unit of next year's forecasted sales and this amount will grow 1% per annum thereafter.
You are required to build your detailed model in Excel to calculate the project's NPV.
Assume that the product life-cycle of seven years is viewed as a safe bet, but that the scale of
demand for the product is highly uncertain. Analyze the sensitivity of the project NPV to the unit
sales scale factor and to the cost of capital. (Hint: Use two way datatable) (this is a bonus part).
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