Calculate the net accounting rate of return

Reference no: EM132532687 , Length: word count:1000

PROJECT TASK

Neptune Electronics Ltd. has spent $1.1 million developing a prototype of a Wearable Smart Phone which was given the nickname ‘Wispr'. The company has spent an additional $600,000 on a feasibility study which confirmed that Neptune was ahead of its competitors in bringing Wispr to market.

The production manager of Neptune has devised some estimates of operational data. Specifically, the numbers comprise: variable costs of $320 and fixed costs are expected to be $4.3 million per year. Sales volume is expected to be 85,000 units in Year 1; 105,000 units in Year 2; 185,000 units in Year 3; 95,000 units in Year 4; 85,000 units in Year 5. The retail price of Wispr will be $680. The necessary manufacturing equipment will cost $88.5 million and will be depreciated straight-line over a useful life of eight years. Its expected value at the end of Year 5 is $20.5 million.

Total net working capital (NWC) for the Wispr project is $900,000 and will occur in Year 1. There will be no other changes to NWC until the project terminates and the NWC is recovered.

Neptune's after-tax cost of capital is 9.5% pa, and the company has a tax rate of 28%.

1. What is the non-discounted payback period of the project?

2. Calculate the net Accounting Rate of Return. (ARR/AAR)

3. Calculate the NPV and IRR of the project.

4. Quantify the NPV's sensitivity to a 10% increase in price and a 10% decrease in quantity sold. In your answer, refer to the NPV's volatility in relation to changes in price and changes in quantity sold. (500 - 700 words).
• In addition, demonstrate and explain forecasting risk; and the implications for how a project is managed.

5. Advise the company on whether it should undertake this investment project.

6. "A positive NPV indicates a project is expected to give a return greater than the market requires." Discuss in relation to the efficient market hypothesis (EMH).

7. What effect, if any, would a positive NPV investment project have on the market value of the corporation?

Attachment:- Report Project Task.rar

Reference no: EM132532687

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