Npv Company Analysis

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March 7th 2012 ECS3250 (2011-2012) Coursework Name: Sean Goodwin Student I.D: M00295169 Part 1 Abbey Trading Company is considering a project that is susceptible to risk. An initial investment of £90,000 will be followed by three years each with the following expected cash flows (there is no inflation or tax): | £ | £ | Annual sales (volume of 100,000 units multiplied by estimated sales price of £2) | | 200,000 | Annual costs (volume of 100,000 units multiplied by unit labour, material & other costs respectively) | | | Labour | 100,000 | | Material | 40,000 | | Other | 10,000150,000 | (150,000) | | | 50,000 | The initial investment consists of £70,000 in machines, which have a zero scrap value at the end of the three-year life of the project and £20,000 in additional working capital which is recoverable at the end. The discount rate is 10%. (1) Calculate the NPVof the project and explain what it means The NPV of the project is £54,345, meaning firstly that this project has a positive present value and therefore worth the time to consider further if it is viable. We arrive at this NPV figure by using all the information given above. Firstly, remember that in this particular case as the future cash flows of £50,000 will be identical over the first 2 years however the final year, the cash flow will have an additional £20,000 added to it, to make £70,000 due to the recoverable working capital. NPV = -90,000 + (50,000/1.1)+(50,000/(1.1) 2)+(70,000/(1.1) 3) = -90,000 +139,369 NPV = £49,369 (2) Conduct a sensitivity analysis on the following four variables and explain which one of them is the most significant in affecting the profitability of the project (assuming all other variables remain constant) For the following sensitivity analysis, I have based my assumptions on a 5% swing up

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