In: Accounting
Fragrances Corporation is an international manufacturer of
fragrances for women. Management is considering expanding the
product...
Fragrances Corporation is an international manufacturer of
fragrances for women. Management is considering expanding the
product line to men’s fragrances.
From the best estimates of the marketing and production
managers, annual cash sales for this new line are 900,000 units at
$100 per unit, cash variable cost is $70 per unit, and cash fixed
costs are $20,000,000 per year. The investment project requires
$32,000,000 of cash outflow and has a project life of 9 years. At
the end of the 9-year useful life, there will be a residual value
of $10,000,000. It is expected that there will need to be an
increase in working capital of $8,000,000.
The required rate of return is 10%.
Requirement
Situation A
Assume the situation as presented above.
- Calculate the NPV of the investment proposal.
- Conclude on whether the project should be undertaken based on
the NPV.
- Calculate the IRR of the investment proposal.
- Conclude on whether the project should be undertaken based on
the IRR.
- Calculate the project profitability index.
Situation B
Assume that the selling price is reduced by 5%.
- Calculate the NPV of the investment proposal.
- Conclude on whether the project should be undertaken based on
the NPV.
- Calculate the IRR of the investment proposal.
- Conclude on whether the project should be undertaken based on
the IRR.
- Calculate the project profitability index.
Situation C
Ignore situation B. Assume that the variable cost per unit is
increased by 10%.
- Calculate the NPV of the investment proposal.
- Conclude on whether the project should be undertaken based on
the NPV.
- Calculate the IRR of the investment proposal.
- Conclude on whether the project should be undertaken based on
the IRR.
- Calculate the project profitability index.