1 Chester plc are considering a project that is susceptible to risk. An initial investment of £290,000 will be followed by seven years with the following 'most likely' cash flows (there is no inflation or tax): Annual Sales (volume of 100,000 units multiplied by estimated sales price of £8) Annual Costs 1(a) 1(b) Labour Materials Other 1(c) £ 400,000 300,000 50,000 £ 800,000 The initial investment of £290,000 in machinery and equipment has an estimated residual value of £90,000 at the end of the seven-year life of the project. The company calculates depreciation on a straight-line basis. The cost of capital is 8%. (750,000) 50,000 Calculate the net present value of the product. Undertake sensitivity analysis to show by how much the following factors would have to change before the project ceased to be worthwhile: ▪ the discount rate; ▪ the sales price; the labour costs; the material costs; and the residual value of the machinery and equipment. State, with reasons, whether or not you feel the project should go ahead.
1 Chester plc are considering a project that is susceptible to risk. An initial investment of £290,000 will be followed by seven years with the following 'most likely' cash flows (there is no inflation or tax): Annual Sales (volume of 100,000 units multiplied by estimated sales price of £8) Annual Costs 1(a) 1(b) Labour Materials Other 1(c) £ 400,000 300,000 50,000 £ 800,000 The initial investment of £290,000 in machinery and equipment has an estimated residual value of £90,000 at the end of the seven-year life of the project. The company calculates depreciation on a straight-line basis. The cost of capital is 8%. (750,000) 50,000 Calculate the net present value of the product. Undertake sensitivity analysis to show by how much the following factors would have to change before the project ceased to be worthwhile: ▪ the discount rate; ▪ the sales price; the labour costs; the material costs; and the residual value of the machinery and equipment. State, with reasons, whether or not you feel the project should go ahead.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Can you help me work out question 1(a) please without having to use excel? Thank you in adv
Transcribed Image Text:1
Chester plc are considering a project that is susceptible to risk. An initial
investment of £290,000 will be followed by seven years with the following 'most
likely' cash flows (there is no inflation or tax):
Annual Sales (volume of 100,000 units multiplied
by estimated sales price of £8)
Annual Costs
Labour
Materials
Other
1(a)
1(b)
£
400,000
300,000
50,000
£
800,000
(750,000)
50,000
The initial investment of £290,000 in machinery and equipment has an estimated
residual value of £90,000 at the end of the seven-year life of the project. The
company calculates depreciation on a straight-line basis. The cost of capital is
8%.
Calculate the net present value of the product.
Undertake sensitivity analysis to show by how much the following factors would
have to change before the project ceased to be worthwhile:
the discount rate;
▪ the sales price;
the labour costs;
the material costs; and
the residual value of the machinery and equipment.
1(c) State, with reasons, whether or not you feel the project should go ahead.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education