A bottle company ALPHA, is considering creating a new bottle of 0.25 lt. To decide whether to invest in this projector not, they performed market research that costed €5,000. The results indicated two possible scenarios that depend on the competitor's reaction to create a similar product and on the percentage of the faithful customers of ALPHA. ScenarioA has a 45% chanceto be realized, while scenarioB has a probability of 55%. For the project's realization the company must purchase specialmachinery that cost €80,000, while transportation and installation costs amount to €2,000. The useful life of the project is two years, and the machinery can be sold at the end of the useful life for €30,000.Table 1 presents the pertinenteconomic data. At the end of the second year the working capital is
Subject 2
A bottle company ALPHA, is considering creating a new bottle of 0.25 lt. To decide whether to invest in this projector not, they performed
€5,000. The results indicated two possible scenarios that depend on the competitor's reaction to create a similar product and on the percentage of the faithful customers of ALPHA. ScenarioA has a 45% chanceto be realized, while scenarioB has a probability of 55%. For the project's realization the company must purchase specialmachinery that cost €80,000, while transportation and installation costs amount to €2,000. The useful life of the project is two years, and the machinery can be sold at the end of the useful life for €30,000.Table 1 presents the pertinenteconomic data. At the end of the second year the working capital is going to be recaptured. The tax rate is 25%, the weighted average cost of capital is 10% and the company fully depreciates fixed assets for tax purposes, using the straight-line
Table 1: Pertinent economic data
|
Year 1 |
Year 2 |
|||
|
Scenario Α |
Scenario Β |
Scenario Α |
Scenario Β |
|
|
Sales in pieces |
150,000 |
200,000 |
200,000 |
250,000 |
|
Variable costper unit of products |
0.8 |
1 |
1 |
1.2 |
|
Sale price per unit of products |
1.5 |
1.7 |
1.8 |
2 |
|
Administrative &marketing expenses |
20,000 |
25,000 |
25,000 |
30,000 |
|
Working Capital |
15,000 |
15,000 |
17,000 |
17,000 |
Questions:
- Calculate the expected net cash flows for each one of the two years.
- Calculate and comment the standard deviations and the coefficient of variations of the NCFs of each year. What do they mean and what do they imply?
- Should ALPHA proceed with the new bottle project based on the NPV evaluation approach?
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please check the calculations. i think they are wrong
by Bartleby Expert
