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
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Question
Calculate the viability of the project based on
Transcribed Image Text:Q3.
Squeeze-a-Grape (SaG) Ltd is a UK company that produces and distributes premium quality fruit
juice on a global scale.
Management is in the process of reviewing whether to undertake a strategy of investing in a new
Fruit Press (during 2022) in a foreign country to meet the growing demand in this new market. The
infrastructure investment will take all year to be finalised with trading commencing in 2023. For
security reasons this project has been given the code name 'Project Sunrise'. The Investment in
2022 is expected to have a resale value of £100,000 at the end of the project in 2030. The
equipment hence has a useful life of 8 years and is depreciated on a straight line basis.
The following information has been provided regarding forecasts that are deemed to be conservative
and achievable.
Project Sunrise
2022 Investment
£500,000
2023 Cash Inflows
£500,000
£750,000
Cash outflows
2024 Cash Inflows
£950,000
£800,000
Cash outflows
2025 Cash Inflows
£1,050,000
£800,000
Cash outflows
2026 Cash Inflows
£1,450,000
£950,000
Cash outflows
2027 Cash Inflows
£1,550,000
£1,150,000
Cash outflows
2028 Cash Inflows
£1,750,000
£1,250,000
Cash outflows
2029 Cash Inflows
£1,850,000
Cash outflows
£1,350,000
2030 Cash Inflows
£1,850,000
Cash outflows
£1,450,000
2031 Clean-up Costs
£1,000,000
Management believe that the project will absorb £500,000 worth of working capital when the project
commences and this will be released in 2031.
Project Sunrise is deemed to be risky and should carry a Required Rate of Return (Discount Rate)
at a premium of 50% above the company's current rate of 6.67% p.a, and hence you need to use
this risk adjusted discount rate.
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