Question

Delta Partners is an investment firm specialising in corporate advice, particularly in regard to raising
finance and company valuation. One of its clients, Pagoda Industries Ltd, recently approached Delta
Partners seeking advice and assistance in regard to raising additional finance. Pagoda has now asked
Delta Partners for advice on whether to introduce a new product in its manufacturing division.
Pagoda Industries Ltd is a large company listed on the Australian Stock Exchange. It is a diversified
company with manufacturing and trading divisions operating in a number of industries. Pagoda’s
research department has developed a new information technology product which is expected to
appeal to the corporate market. Because of the rapid advances in information technology, the
product is expected to have a life of five years before it becomes obsolete. Consequently, the project
would be terminated after five years.
Pagoda has put together the following information about the product:
Cost of new plant and equipment $7,900,000
Transport and installation costs $100,000
Unit Sales:
Year Units Sold
1 70,000
2 120,000
3 140,000
4 80,000
5 60,000
Sales Price per Unit:
Years 1-4 $300
Year 5 $260
Variable Cost per Unit $180
Annual Fixed Costs $200,000
Net Working Capital:
An initial investment of $100,000 in net working capital is required to get the project started.
Additionally, net working capital equal to 10 per cent of the value of sales will be required each year
(including year one).
The plant and equipment are expected to have a salvage value of $500,000 at the end of the
project’s life. The company tax rate is 30 per cent. Pagoda’s required return for this project is 15 per
cent.
Required: As a financial analyst for Delta Partners you have been asked to:
a) Calculate the yearly cash flows and the yearly net after-tax cash flow associated with the
project
b) Calculate the Net Present Value (

Answer 1