Reference no: EM132967331

Care and Safe Ltd is a manufacturer of healthcare products. The company is evaluating the feasibility of a new household disinfectant product that uses ultraviolet radiation technology. The company spent $250,000 in research related to the product last year.

The project has a lifespan of 10 years. The company believes it can sell 1,000,000 products each year at $6.00 each. The operating expense is expected to be $1.35 per product and fixed costs are expected to be $250,000 per year. The production and sales will require an initial $5,000,000 investment in working capital.

The new manufacturing equipment will cost $15,000,000. The equipment will be fully depreciated using the straight-line method over the life of the project. The company expects to sell the equipment for $2,000,000 at the end of the project. Rather than acquiring a new building, the company can install the equipment in a building that it owns. However, the company is currently negotiating to sell the building for $3,000,000. If the company uses the building it will sell the building at the end of the project and the value of the building is expected to be stagnant over the entire period of the project.

Assume all cash flows relating to sales and costs are received or made at the end of each year. Company's required payback is 5 years and required rate of return is 11.5%. The company tax rate is 30%.

As a financial manager of the company, you're conducting a capital budgeting analysis of this project.

Problem 1: Calculate the incremental cash flows for each year (Y0 to Y10 inclusive).

Problem 2: Calculate the payback period of the project. (Show answer correct to two decimal places.)

Problem 3: Calculate the net present value, that is, the net benefit or net loss of the project, in present value terms. (Show answer correct to the nearer cent.)

Problem 4: Calculate the present value index of the project. (Show answer correct to four decimal places.)

Problem 5: Calculate the discounted payback period of the project. (Show answer correct to two decimal places)

Problem 6: Calculate the internal rate of return of the project using 'trial & error and interpolation' method. (Show answer correct to four decimal places)

Problem 7: Explain under each criteria (that you calculated above) - and overall - if the company should accept this project or not.