Question 1

XYZ is considering purchasing an equipment. The cost is $900,000 (t = 0). The inventory will
increase by $175,000 and account payable will increase by $75,000 (the net change in operating
working capital will be $100,000).
The project will last for 4 years. XYZ forecasts of sales of 537,000 units in year 1 (t =1), 520,000
units in year 2 (t = 2), 505,000 units in year 3 (t = 3), and 490,000 in year 4 (t = 4). The unit price
is $10.
The fixed cost is $2,000,000 each year and the variable cost to product each unit is $5.092 for
year 1 (t =1), $5.391 for year 2 (t =2), $5.228 for year 3 (t = 3), and $6.106 for year 4 (t = 4).
Allied will use straight line depreciation method.
After 4 years, XYZ expects a salvage value of the equipment to be $50,000. The company
expects to fully recover the NOWC of $100,000
The tax rate for the firm is 40%
The project’s WACC is estimated to be 10%
Question: Should Allied take the project?

Question 2

A firm is thinking about launching a new product. The initial investment in equipment is

$600,000. The project has an estimated life of five years. The revenue per year is estimated to be
$400,000, and operating costs per year is estimated to be $200,000. 
The investment in the net working capital will be $40,000 at the beginning of the project; 40% of
this will be recovered at the end of year 4, and the rest at the end of year 5. The tax rate is 30%
and the CCA rate for depreciation purposes is 20%. The equipment can be sold at the end of the
project for $60,000.  There is an on-going feasibility study regarding the project. The feasibility
study is done by ACDT Consulting Group. They have been paid $50,000 a year ago, and they
will be paid another $50,000 today. The cost of capital for the project is 10%.

 Calculate the NPV of the project to see if the company should undertake this project.  

Question 3

ABC Company, a diversified group is considering to venture into a new project in sugar

processing. A feasibility study was conducted revealing the following information;

Cost $2 million, Salvage value $300000 after full depreciation

Working capital 20% of cost provided now, 50% recovered by end of project life.
Sales per year $3m in year 1,growing by 10% on previous year sales

Variable cost 40% of sales

Fixed cost $500000 per year

Wear & Tear Straight line over 4 year project life

Marginal tax rate 30%

WACC 17%

Required: As a Graduate Trainee of the company, the Managing Director has approached

you seeking a second opinion on the project’s attractiveness. State your recommendations

based on the following methods of investment appraisal.

a) Net Present Value Method (NPV)

b) Internal Rate of Return (IRR)