CASE STUDY
Radiant Laundry Product Company
Please read the case of Radiant Laundry Product Company before starting this assignment.
Your task as a financial analyst is to prepare a project evaluation report to Mr Waldo of Radiant Laundry Products Company indicating whether the firm should accept or reject the FAB project. Your report should include the answers to the following Questions 1 to 6. It is important to list your assumptions in applying the project evaluation methods, and show clearly the workings in deriving your results. Your assignment will be graded on presentation, understanding of the issues and logical explanation, and accuracy of calculations in solving the problems.
QUESTIONS
1. On the basis of costs, would you recommend Radiant to purchase the specialised equipment and packaging facilities from Donnalley Limited or Danforth Limited? [You may assume both companies are able to supply the equipment on the same terms indefinitely.]
2. Based on your chosen specialised equipment and packaging facilities in Question 1, prepare a cash flow table (which incorporates taxes and includes initial investment, operating and terminal cash flows) using the information given in the case. Explain if each of the following items should be included in the cash flow table. List clearly your assumptions in deriving the figures.
a) The cost of $150,000 from market testing.
b) Annual interest expense on the new 10 percent fixed-term loan needed to finance this project.
c) Initial working capital investment of $100,000 and 12% of the increased net cash flows in subsequent years.
d) The erosion of sales from current laundry detergent products.
e) The cost of using current excess production facilities including the annual rental cost of $120,000 to an outside firm. [Assume acceptance of the FAB project would affect only the timing and not the cost of the proposed outlay for the new plant and facilities based on the projected growth of current production.]
3. Calculate the payback period, net present value (NPV), internal rate of return (IRR), and profitability index (PI) of this project. Assume the payback rule used by Radiant was a cut-off period of five years. Based on each of the four different methods of investment evaluation, would you accept or reject this project?
4. If there was a chance that a rejection of the FAB project would result in the introduction of similar product by a direct competitor, would this affect your answers in Question 3? Under this assumption, would you accept or reject this project based on the NPV method?
5. It is necessary to check if the project made financial sense before it is accepted. Based on the cash flow table derived in Question 3 [Hint: Provide the answers for this question even if your decision is to reject the project.]:
a) Show a sensitivity analysis of NPVs to changes in annual increased net cash flows and cost of capital individually. Assume each of these variables can deviate from its estimated value by plus or minus 20%.
b) Calculate the minimum level of annual increased net cash flows necessary for the project to be accepted.
c) Another source of uncertainty is the expected rate of inflation. After reviewing, you realised the effect of inflation has not been adjusted for all estimates of revenues and costs. Some people were talking about a zero long-term inflation rate, but you wondered what would happen if inflation is 3% per annum.
6. Consider all information given in the case study and the results derived in Questions 1 to 5. Advise the executive committee and Mr Waldo on whether they should invest in the FAB project. Discuss the reasons for your recommendation and any reservations you may have in given this advice.
Attachment:- Case.rar