Reference no: EM132492189

Advanced Phone Corporation is considering the manufacture of a new mobile phone, Mobile P, for which a feasibility studies was conducted. If the project goes ahead:

1. modifications on existing machinery would have to be made at a onceoff cost of R4 million before production commences.
2. maintenance of the machinery would be at R500 000 per annum.
3. additional working capital would be R1 million at the start of the project - to be recovered at the end of five years.
4. initial marketing costs for the approved project will amount to R1.5 million.
5. Annual marketing costs would be at R150 000 per annum for the full five years, starting in year 1.
6. All costs and revenues are expected to be in cash.
7. The selling price and direct cost per unit is expected to be R900 and R630, respectively.

It was predicted that the phone would have a five-year life span before being replaced with better phones. The predicted demand (in units) per year is as follows:

Year     Units

Year 1 10 000

Year 2 11 150

Year 3 15 000

Year 4 8 000

Year 5 6 500

• Assume that Advanced Phone Corporation's cost of capital is at 20%.

Required:

Question 1: Calculate the cash flows associated with the production of the new mobile phones, Mobile P. Note: show details of cash flows considered.

Question 2: Calculate the net present value (NPV) of the project.

Question 3:  Based on your calculation, do you think the company should go ahead with the project? Substantiate your answer