Reference no: EM132981159
Question - Crystal Investments wants to decide between two investments. The first is a flour mill which will require an investment of 10,000,000 in land, plants and equipment. The mill expects to make $6,000,000 in revenue in the first year and this is expected to grow at the rate of 3% per annum till the end of the tenth year. All costs were estimated to be $2,000,000 in the first but will grow at the rate of 4% until the end of the investment horizon which is in the tenth year. Working capital is $1,200,000 which will be returned at the end of the investment horizon. The company's weighted average cost of capital is 5%. Depreciation is $1,000,000 per year. The second investment is a textile factory that generates a revenue of $15,000,000 at a cost of $8,500,000 per year. Due to recent automation in the factory, costs were expected to be reduced by 5% from the 3rd year but by this same time, revenue will also be dropping to $10,000,000 till the end of the investment horizon. Depreciation is $2,000,000 per year and working capital of $7,000,000. The weighted average cost of capital for the factory is 12%.
Required -
1. Which project should Crystal choose?
2. What will happen if the cost of capital changes by 5% upward and downward?
3. Prepare report based on the above results to the management of Crystal Investments using graphs of the sensitivity analysis in 2 and other relevant information to convince them about the prospects of the projects and the one to choose.
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