Question

In: Statistics and Probability

Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and...

Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and the National Sports Council of Zambia (NSCZ) to undertake a project to manufacture an innovative muscle toning device (Muleza) that will be used in the treatment of sporting injuries. It is expected that the commercial life of the Muleza will be four years after which technological advances will bring more sophisticated devices to the market and the sales will fall to virtually zero. K8, 000,000 has been spent in developing and testing the device over the past year. Initial market research has been conducted at a cost of K2, 500,000 and is due to be paid shortly. The market research indicates the following demand and selling price per unit: Year (from now) 2 3 4 5 Units demand 2,000 70,000 125,000 20,000 Selling Price K2, 000 K2,200 K1,600 K1,400 A factory will be built for the production of the Muleza for K30, 000,000 and will take a year to complete. Payment will be made in two instalments; the first instalment of K18, 000,000 is payable immediately and the remainder in a year’s time. The factory building is expected to be sold for K25, 000,000 when the production and sales cease. Machinery costing K16, 000,000 will be installed at the end of the first year. The machinery will be depreciated on a straight-line basis over the next four years and is expected to have a nil value at the end of the four years. At present the materials cost of making one Muleza unit is K700. Njenge has enough materials in stock to make 1,500 units, which it had purchased a year ago for K450 per Muleza unit. If the project does not go ahead then these materials will be sold for an equivalent of K120 per Muleza unit. Labour that will be used to make the Muleza is to be made redundant immediately at a cost of K2,000,000 if the project does not go ahead. Labour costs per unit are K250. It is expected that once the project is completed, the labour will be made redundant at a cost of K3, 500,000. Fixed production overheads relating specifically to the production of the Muleza are expected to be K13,000,000 per annum and variable production overheads are expected to be K150 per Muleza unit produced and sold. Administrative costs are expected to be K17, 000,000 per annum of which K5,500,000 is allocated from the head office and the remainder relates directly to the production of the Muleza. Working capital of K10,000,000 will be required at the beginning of the second year once the production and sales have commenced. This will be released when the production and sales cease. The relevant cost of capital for the project is 9%. Assume that all cash flows occur at the year- end unless stated otherwise. All workings should be in K’000s to the nearest K’000. Ignore tax and inflation. Required: (a) Calculate the net present value and internal rate of return of the project and recommend whether the Muleza should be produced. Provide a brief justification of the cash flows included and excluded in the calculations.

Solutions

Expert Solution

NOTE: PLEASE LIKE THE ANSWER, IT WILL ENCOURAGE ME. IF YOU HAVE ANY DOUBTS AND QUERIES ON THIS ANSWER PLEASE FEEL FREE TO COMMENT BELOW. I WILL REPLY "ASAP" AND PLEASE DONT DISLIKE THIS ANSWER.
HOPE I ANSWERED YOUR QUESTION.
THANK YOU.........

K 8 million spent on developing and testing is a sunk cost and not relevant
K 2.5 million on market research is a committed cost and not relevant for this analysis
Present Value(PV) of Cash Flow:
(Cash Flow)/((1+i)^N)
i=discount rate =Cost of Capital=9%=0.09
N=Year   of Cash Flow
Direct material cost in year 2
For 1500 units Opportunity cost=1500*150 225000
For balance 500 units, cost=500*700 350000
Material cost in year 2=225000+350000 575000
Material cost in year 3 49000000 (70000*700)
Material cost in year 4 87500000 (125000*700)
Material cost in year 5 14000000 (20000*700)
Annual Depreciation expense (16000000/4) 4000000 (Depreciation is a non cash expense. Since tax is ignored, there is no depreciation tax shield)
(All Figures in 000 K)
CASH FLOW ANALYSIS OF THE PROJECT
N Year 0 1 2 3 4 5
a Cash Flow to built factory              (18,000)                (12,000)
b Cash Flow for Machinery purchase                (16,000)
c Cash Flow for Working Capital                (10,000)
d Annual Demand in units                    2,000                  70,000          125,000      20,000
e Selling Price per unit (K000)                         2.0                         2.2                   1.6             1.4
f=d*e Annual Sales Revenue                    4,000                154,000          200,000      28,000
g Annual Materials Costs                      (575)                (49,000)          (87,500)    (14,000)
h Savings in cost of labor redundancy                20,000
i=d*0.25 Annual Labor Cost                      (500)                (17,500)          (31,250)      (5,000)
j=d*0.15 Variable Production Overhead                      (300)                (10,500)          (18,750)      (3,000)
k Fixed Production Overhead                (13,000)                (13,000)          (13,000)    (13,000)
l Administrative Expense(17000-5500)                (11,500)                (11,500)          (11,500)    (11,500)
M=f+g+h+i+j+k+l Operating Cash Flow                20,000                            -                  (21,875)                  52,500            38,000    (18,500)
Terminal Cash Flow:
p Salvage value of factory      25,000
q Release of initial working capital                           -        10,000
r Terminal Labor redundancy cost                           -        (3,500)
T=p+q+r Total Terminal Cash Flow      31,500
CF=a+b+c+M+T Net Cash Flow                  2,000                (38,000)                (21,875)                  52,500            38,000      13,000 SUM
PV=CF/(1.09^N) Present Value of Net Cash Flow                  2,000                (34,862)                (18,412)                  40,540            26,920         8,449      24,635
NPV=Sum of PV Net Present Value(NPV) K 24,635,000
Internal Rate of Return 30.80%
(Using IRR function of excel)

Related Solutions

Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and...
Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and the National Sports Council of Zambia (NSCZ) to undertake a project to manufacture an innovative muscle toning device (Muleza) that will be used in the treatment of sporting injuries. It is expected that the commercial life of the Muleza will be four years after which technological advances will bring more sophisticated devices to the market and the sales will fall to virtually zero. K8,...
A special purpose vehicle (SPV) has been incorporated to undertake an energy infrastructure project in a country with a gross national income (GNI)
A special purpose vehicle (SPV) has been incorporated to undertake an energy infrastructure project in a country with a gross national income (GNI) per capita of US$1,000. Explain four key categories of risks which the SPV is likely to encounter in undertaking the project.
There are a senior manager at Zambia Airways and have been authorized to spend up to...
There are a senior manager at Zambia Airways and have been authorized to spend up to K400,000 FOR THE PROJECTS. The three projects you are considering have the fillowing characterics; Project Details Project A Intial investment of K280,000 .Cash flow of K190,000 at year 1 and K 170,000 at yr 2. This is a plant expansion project Project B Intial investment of K390,000. Cash flow of K270,000 at year 1 and K 240,000 at year 2. this is a new...
What is a pilot cell? What purpose does it serve? How do you set up a...
What is a pilot cell? What purpose does it serve? How do you set up a pilot cell?
How many special purpose funds does it define?
How many special purpose funds does it define?
Clarify what is meant by the term "special purpose" audit
Clarify what is meant by the term "special purpose" audit
After a college football team once again lost a game to their archrival, the alumni association...
After a college football team once again lost a game to their archrival, the alumni association conducted a survey to see if alumni were in favor of firing the coach. A simple random sample of 100 alumni from the population of all living alumni was taken. Sixty-four of the alumni in the sample were in favor of firing the coach. Let p represent the proportion of all living alumni who favored firing the coach. Suppose the alumni association wished to...
4) An association football (soccer) striker never hits the ball above the crossbar. However, in the...
4) An association football (soccer) striker never hits the ball above the crossbar. However, in the horizontal direction, his strikes are normally distributed and centered 3 feet to the left of the goal center with a standard deviation of 8 feet. What is the probability that he will score a goal on a given attempt? (Hint: You need to first find the width of a soccer goal. Also, assume that all strikes in the goal region result in a goal.)
Set up an integral for the following scenarios: Set up the integral in simplified form, do...
Set up an integral for the following scenarios: Set up the integral in simplified form, do not integrate a) Arc length of y = ln x , 2 ≤ x ≤ 4 . b) The surface area generated by rotating y = sin x with respect to the x-axis, 0 ≤ x ≤ π . c) The arc length of y = x 2 + 4 , 1≤ x ≤ 3 . d) The surface area generated by revolving y...
Describe the purpose and structure of the American Health Information Management Association (AHIMA)
Describe the purpose and structure of the American Health Information Management Association (AHIMA)
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT