Reference no: EM132518730

SN Thomson Ltd produces solar panels for the Australian residential market. Due to high demand for solar panels, the company has decided to extend its installation services to include batteries which store the energy captured by the panels. They have just conducted a market study costing $20,000 which provided them positive customer response regarding the demand for the batteries.

• The company expects to sell 5,000 units of batteries in the first year. The number of units sold is then expected to grow at 15% per annum. The price for each unit in the first year will be AU$12,000. It is expected that this price will then grow by 5% each year. The variable costs will be 70% of the sale price per year. The fixed costs are expected to be $3,000,000 for the first year and then will increase by 2% per annum every year. The project will also require $1,500,000 working capital.

• This project will require an initial investment of $56,000,000, which will be depreciated straight line to zero over its four year life. The company believes it can sell the equipment at the termination of the project for $8,000,000.

• Assume that all cash flows after the initial outlay occur at the end of each year. The company tax rate is 30%. SN Thomson's required payback is 3 years and required rate of return is 10%.

Question a. Calculate the incremental cash flows for each year (Y0 to Y4 inclusive).

Question b. Calculate the payback period of the project.

Question c. Calculate the net present value, that is, the net benefit or net loss in present value terms of the project.

Question d. Calculate the present value index of the project.

Question e. Calculate the discounted payback period of the project. 

Question f. Calculate the internal rate of return of the project.

Question g. Identify and explain what other factors SN Thomson should consider. Explain if the company should accept the project or not.