• Internal Code :
  • Subject Code : EFN406
  • University : Queensland University of Technology
  • Subject Name : Finance

Answers

P1:

  1. The calculations indicate that 3 year-period is the most suitable before the company considers making replacements with new ones. This is because the 3rd years has the lowest Equivalent Annual Cost (EAC)

P/S: EAC is the formula used to determine the optimum period to replace an asset 

EAC: It is the equivalent annual cash flows referring to the collective normal uneven cash flows that should be of equal value of an asset’s PV (Present Value). So as to calculate the EAC of different time periods, the total value applicable for each of the time scale is converted into an annuity or EAC. 

EAC is calculated using the following formula: PV of Cost/ Current Annuity Factor 

Therefore, the time scale with the lowest EAC is identified as the Assets optimum replacement period.

Explanation of results ( SEE EXCEL ATTACHMENTS FOR CALCULATIONS AND RESULTS) 

Explanation:

1.Calculation of Present values of cost of 3, 4, 5 and 6 years by using excel formula:

Result of the above:

The First-time scale, 3 years, the car’s Present Value = $164,420.

The Current Annuity Factor ( 3 years’ time scale) calculated at 10 % rate = 2.487

Therefore, the Equivalent Annual Cashflow is:

164,420 divided by 2.487 as indicated in the formula above = 66,112

The Second-time scale, 4 years, the car’s Present Value = $210,855.

Its Current Annuity Factor ( 4 years’ time scale) calculated at 10 % rate = 3.170

Therefore, the Equivalent Annual Cashflow is:

$210,855divided by 3.170as indicated in the formula above is 66,516

The Third-time scale, 6 years, the car’s Present Value = $ 310,880

Its Current Annuity Factor ( 5 years’ time scale) calculated at 10 % rate = 4.355

Therefore, the Equivalent Annual Cashflow is:

$ 310,880 divided by 4.355 as indicated in the formula above is $ 71,385.

P/S : Tax and the rate of inflation are not included when determining an assets Equivalent Annual Cashflow

  1. a) The calculations show that the project’s current NPV( Net Present Value) equals to - $ 543,642. Therefore, the project outcomes indicate a loss operating cost and as such not viable. Its implementation of the proposed investment is not acceptable because it exposes the company to losses. 

b) The sensitive analysis indicates:

  • the sensitivity value of the project in relation to revenue is 1.3 %

  • the sensitivity value of the project in relation to the resale of the value of land is 16.38 %

  • the sensitivity value of the project in relation to the required rate of return is 33. %

Explanation of Results (SEE EXCEL ATTACHMENTS FOR CALCULATIONS AND RESULTS) :

2.a) Calculation of NPV of project by using excel formula ( SEE EXCEL ATTACHMENTS FOR CALCULATIONS AND RESULTS):

 

Result of the above:

NPV = Net PV of cash inflows – Net PV of cash outflows

        =    $17333033- $17876675

        = - ($ 543,642)

The project’s  Net Present Value ( NPV) is -$543,642. Therefore, it is not acceptable because it exposes the company to losses. 

P/S : Feasibility study costs is considered a sunk cost when determining NPV therefore is not incorporated in the calculations. However, loan interest expense is deducted during tax therefore inclusive in the calculations. 

b) The formula for determining the SA (Sensitivity Analysis) is:

SA = NPV/ PV of the cash flow considered during that period: 

  1. SA of net sales revenue = $543,642 /($8,000,000*3.037+$9,000,000*(4.968-3.037))*100% = 1.3 %

The result indicate that sales forecasts will fall above 1.3 % and therefore the project is unacceptable

  1. SA of Resale value of land = $543,642 ($8000,000*0.404))*100% = 16.32 %

The result indicate that a $543,642 fall of the NPV causes an equal fall of the PV proceeds The current PV proceeds is valued at $3,232,000 and therefore, the acceptable fall percentage is 17 %. 

  1. SA of Required Rate of Return = (12%-8%)/12%*100

Therefore the SA of RRR = 33% 

P/S: SA of RRR = (Annual Cashflows Discount Factor at the rate of 12 % of PV- Annual Cashflows Discount Factor at the rate of 8 % of PV) / 12 % multiplied by 100

The result indicate that the costs of the net capital must  fall within a relative rate of 33% prior to NPV reaching zero.

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