Amadeus Corporation is considering the issue of a new product to be added to its product mix. They hired you, a recent business graduate from MacEwan, for conducting the analysis. The production line would be set up in an unused space at the company’s main plant. The plant space could be leased out to another firm at $15,000 per year starting from year 1. They should buy new machinery. The approximate cost of the machine would be $160,000, with another $16,000 in shipping and handling charges. It would also cost an additional $24,000 to install the equipment. The machinery has an economic life of 5 years and would be in Class 8 with a CCA rate of 35%. The machinery is expected to have a salvage value of $90,000 after 5 years of use.
The new product line would generate incremental sales of 1,500 units per year for 5 years and they are expected to grow 4% per year. The cost per unit is estimated in $60 per unit in the first year. Each unit can be sold for $210 in the first year. The sales price and cost per unit are both expected to increase by 3 % per year due to inflation. The fixed costs are estimated to be $90,000 at the end of 1st year and would increase with inflation. To handle the new product line, the firm’s net operating working capital would be an amount equal to 17% of sales revenues. The firm tax rate is 35%. There are 1000 common shares outstanding with market price of $40 each. Also, they have 100 preferred shares with market value of $50. There are $50,000 long-term bond trading in market with an average price of $1,100 and 6 years to maturity, and 8% semi-annual coupon. Common shares of firm have a beta of 1.3. Risk free rate is 4% and expected market return is 16%. Preferred stock holder are receiving 1 dollar quarterly dividend. The project is considered by the financial department to be as risky as the company. The reinvestment risk is assumed to be 15%.
THE FIXED COST ONWARDS YEAR 2 is 3%
Requirements
1. Using an Excel spreadsheet:
Find the NPV, IRR and MIRR of the project by using the pro forma financial statement method to determine cash flows.
Enter the input variables in cells of their own at the top of the spreadsheet (so it is easier to do sensitivity analysis calculations).
Set up the necessary equations by referencing to the input variable cells. The spreadsheet must be formula driven; do not put any numbers in equations, only cell references.
Use Excel’s built-in functions wherever possible (e.g. NPV and IRR functions).
2. Breakeven analysis
At what WACC rate and Unit Sales price the project is going to break-even based on NPV method.
3. Sensitivity analysis
Consider the following assumptions for the company and for each case individually calculate the NPV and include these analyses in your final recommendation.
Perform sensitivity analysis on the unit sales, variable costs and the fixed cost for the project. Assume that each of these variables can vary from its base-case value by ±15%. Summarize the results in a table (NPVs and IRRs for each sensitivity.