Stay Young, plc is a cosmetics manufacturer, despite being relatively new, has enjoyed significant success and achieved sales growth rates of over 20% in the last five years.

It has now identified another growth opportunity which involves exporting its products to Asia and South America and this opportunity would double the size of the company both in terms of long term financing raised and in terms of sales.

In order to pursue this opportunity, the company will have to build a new factory for which they have identified a site, and they believe the factory could be up and running in 2 years.

Currently, Stay Young, plc believes the level of risk of its activity is the same as the average level of risk for its industrial sector, resulting in a discount rate of 12.64% but there are currently differing views on the board of Stay Young, plc on how this investment would affect that level of risk.

Financial Information

Stay Young, plc has made the following assessment of the financials associated with this investment opportunity:

• Feasibility study on the site of the new factory has been conducted for £1million, of which half has been paid and the other half will be paid in six months' time;

• Required investment in acquiring the land and building the factory is £4million, which will be spent 75% now and 25% at the end of this year

• Sales are expected to be 750,000units in year one at an average price of £2.5 per unitsplit evenly between the two geographical areas

• Unitsales are expected to grow at 25% per year in Asia and 10% per yearin South America for the first4 years, after which they will stabilise, while prices are expected to remain unchanged in real terms for the whole period of the analysis;

• Variable production costs will follow the following patterns:

o Materials -30% of price in year one, decreasing by five percentage points in each of the following3 years, after which is stabilises;

o Labour

-20% of price in year one, decreasing by 25% in each of the following2 years, after which is stabilises;

o Other costs

-5% of price throughout the planning period

• Administration costs are expected to be 15% of salesin year one. They will remain at the same absolute value until year four,at which time they will increase by 10%, and then will remain unchanged until the end of the planning period

• Increase in working capitalwill bein line with increase in sales for the first three years and no change afterwards.

Initial working capital is £0.5million;

• The factory is expected to last for 20 years, and will be depreciated over that period of time.

It is not the company's intention to make any significant changes to its existing business and it normally uses a 7
-year planning period.

Inflation rate is expected to be 3.5% per year and the company pays Corporate Tax at a rate of 30%.

Required

1. to fill the following tables

Profitability

Cash flow

2. Calculate

1. Net Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Payback Period (PbP)
4. Average Rate of Return (ARR)

3. Calculate the Weighted Average Cost of Capital (WACC) for Stay Young.

4. Identify what you believe are the two key factors for the success of this project and prepare two sensitivity analysis assuming a 20% deterioration in each of those factors.