Reference no: EM132955061

Question - Nana oil is considering investing $500m in equipment to produce new engine oil, which due to their market intelligence will perform exceptionally well on the market. Sales of the product are expected to continue for three years, at the end of which the equipment will have a residual value of $80m. Sales revenue of $600m pa will be generated at a variable cost of $350m. Annual fixed costs will increase by $40m.

a) On the basis of the above estimates, establish whether, the project should be undertaken, assuming that all cash flows occur at annual intervals and that Clean Oil has a cost of capital of 15%.

b) Calculate the sensitivity of the project with respect to the following:

i) Initial investment

ii) Residual value

iii) Selling price

iv) Unit variable cost

v) Annual fixed cost

vi) Sales volume

vii) Cost of capital