FIN 300 TUTORIAL QUESTION
TOPIC 2
Kwena (Pty) Ltd is considering a project to launch a new product. The project
machinery will cost P720,000 and have a four-year life with no salvage value at the
end of four years. The machinery will be depreciated using the straight-line
method. The required rate of return on the project is 14% and the relevant tax rate
is 30%.
The project figures for the base-case scenario are;
1.
2.
3.
4.
Sales are projected at 200 units per year
Price per unit is P21,000
Variable costs per unit will be P15,000
Fixed costs are P225,000 per year
It is estimated that the projected figures in No. 1 - 4 above are probably accurate to
within +/- 10%.
You are required to;
A. Calculate the base case Operating Cash Flow (using the “tax shield
approach”) and the NPV of this project.
B. Calculate the sensitivity of the base case NPV to changes in “price per unit”
and “fixed costs”. Which of these two is the NPV most sensitive to?
C. Calculate the worst-case and best-case OCFs and NPVs for this project.
D. Using the scenario analysis technique, quantify the risk of risk inherent in
the NPV result of this project using the standard deviation and coefficient of
variation of the expected NPV.
E. What “risk adjusted discount rate” relative to an average risk project in the
organisation would you use for this project, and why?