Environment

Topics: Net present value, Cash flow, Internal rate of return Pages: 4 (417 words) Published: April 10, 2013
CORPORATE FINANCE (FIN3CFI)

TUTORIAL ASSESSMENT TASK 1 – TUTORIAL 3 (WEEK 4)

Research and development activity by The Hard Driver Company Ltd has lead to the development of a revolutionary new large-capacity, slim-line mobile hard drive data storage unit, and the company is contemplating beginning production and distribution of the unit. The construction cost of the plant to manufacture the mobile hard drives is estimated at $10,000,000, and the distribution of the hard drive units is expected to generate annual before-tax and depreciation cash flows of $2,300,000 over the ten-year useful life of the plant. The plant will be depreciated prime-cost to zero book value over this 10-year operating period, it will have no salvage value at the end of year 10, and the company faces a corporate tax rate of 30%. The company’s after-tax required rate of return on the project is 12% per annum.

Required:
1) Determine the project’s net project value (NPV), present value index (PVI) ratio and undiscounted payback period (in fractional years). 2) Use the NPV formula to verify that the internal rate of return (IRR) is about 13.9%. 3) With appropriate justification, briefly explain whether The Hard Driver Company Ltd should undertake the project.

Relevant formulas:

Annual net cash flow (using the short-cut method) = Before-tax and depreciation cash flow × (1 – tax rate) + Annual depreciation × (tax rate)

Project net present value (NPV):
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Time Allowed: 10 minutes

Marking Scheme: Six marks for parts 1) and two marks each for parts 2) and 3)

NAME AND STUDENT ID: ____________________________________
Answers are to be provided below:

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