2. Based on your chosen specialised equipment and packaging facilities in Question 1, prepare a cash flow table (which incorporates taxes and includes initial investment, operating and terminal cash flows) using the information given in the case.
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1 |
Radiant should purchase the specialized equipment and packaging facilities from Donnalley Limited because it would be $2.6 million cheaper than |
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Danforth from a cost basis. |
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2a |
No, the market testing cost is a sunk cost, hence it is not relevant to include into the future cash flows. |
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2b |
No, the annual interest expense should be ignored because cost of financing is accounted for in the discount rate. |
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2c |
Yes, the change in working capital is relevant and hence these cash flows should be recognized. |
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2d |
Yes, the erosion of sales from current detergents should be included as these will affect the future revenues, and hence are a cost Radiant will bear should it produce FAB. |
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2e |
Yes, the cost of using current excess production facilities and annual rental cost to an outside firms, should be included as these are opportunity costs arising from utilizing current resources elsewhere. |
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3 |
criterion |
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Decision |
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NPV |
$ (311,173) |
<0; Reject |
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IRR |
10.22% |
< 15%; Reject |
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Payback Period |
4.56 |
Accept <5 years |
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Profitability Index |
0.85 |
< 1; Reject |
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Radiant should Reject the project |
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4 |
Yes, competitive actions may affect future sales revenue, as revenues would be diverted elsewhere, hence qualitative decisions should be considered alongside any quantitative decisions, when making project decisions. However, on a |
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NPV basis, the project should be rejected on an isolation basis. |
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5a |
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VARIABLE: NET CASH FLOWS |
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Scenario |
Cost of capital |
NPV |
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-20% |
15% |
(668,938) |
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0% |
15% |
(311,173) |
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20% |
15% |
46,593 |
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VARIABLE: COST OF CAPITAL |
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Scenario |
Cost of capital |
NPV |
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-20% |
-5% |
2,100,884 |
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0% |
15% |
(311,173) |
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20% |
35% |
(1,017,432) |
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5b |
Minimum -17% |
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5c |
NPV -(233,492) IRR-11.49% Payback Period-4.35 Profitability Index-0.89 |
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6 |
Radiant should reject the project on the current basis. However, from the sensitivity analysis, if they are able to increase net cash flows by at least 17% or are able to reduce their cost of capital to 10.22% , then they should invest in the project. Furthermore, inflation should be factored into the cash flows as this will also have an impaction on the NPV |
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Lastly, quantitative methods such as NPV should not be considered in isolation. Radiant should also consider other qualitative decisions, such as competitor actions, which may affect future revenues. |
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CASH FLOWS
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Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Year 9 |
Year 10 |
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Operating Revenue |
630,000 |
630,000 |
660,000 |
660,000 |
690,000 |
690,000 |
690,000 |
590,000 |
590,000 |
590,000 |
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Less loss of Revenue |
90,000 |
90,000 |
110,000 |
110,000 |
130,000 |
130,000 |
130,000 |
100,000 |
100,000 |
100,000 |
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Less operating costs |
120,000 |
120,000 |
120,000 |
120,000 |
120,000 |
120,000 |
2,120,000 |
120,000 |
120,000 |
120,000 |
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Operating profit |
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420,000 |
420,000 |
430,000 |
430,000 |
440,000 |
440,000 |
(1,560,000) |
370,000 |
370,000 |
370,000 |
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Less Depreciation Exp |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
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Net Income before tax |
(105,000) |
(105,000) |
(95,000) |
(95,000) |
(85,000) |
(85,000) |
(2,085,000) |
(155,000) |
(155,000) |
(155,000) |
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Less Income Tax |
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(31,500) |
(31,500) |
(28,500) |
(28,500) |
(25,500) |
(25,500) |
(625,500) |
(46,500) |
(46,500) |
(46,500) |
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Net Income after Tax |
(73,500) |
(73,500) |
(66,500) |
(66,500) |
(59,500) |
(59,500) |
(1,459,500) |
(108,500) |
(108,500) |
(108,500) |
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Add Depreciation |
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525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
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Operating ATCF |
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451,500 |
451,500 |
458,500 |
458,500 |
465,500 |
465,500 |
(934,500) |
416,500 |
416,500 |
416,500 |
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Working capital |
(100,000) |
(75,600) |
(75,600) |
(79,200) |
(79,200) |
(82,800) |
(82,800) |
(82,800) |
(70,800) |
(70,800) |
(70,800) |
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Change in Working Capital |
(100,000) |
24,400 |
0 |
(3,600) |
0 |
(3,600) |
0 |
0 |
12,000 |
0 |
0 |
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Operating ATCF |
(100,000) |
475,900 |
451,500 |
454,900 |
458,500 |
461,900 |
465,500 |
(934,500) |
428,500 |
416,500 |
487,300 |
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Initial Investment |
(2,000,000) |
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Terminal ATCF |
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56,000 |
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ATCF |
(2,100,000) |
475,900 |
451,500 |
454,900 |
458,500 |
461,900 |
465,500 |
(934,500) |
428,500 |
416,500 |
543,300 |
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Cum ATCF |
(2,100,000) |
475,900 |
927,400 |
1,382,300 |
1,840,800 |
2,302,700 |
2,768,200 |
1,833,700 |
2,262,200 |
2,678,700 |
3,222,000 |
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NPV |
(311,173) |
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IRR |
10.22% |
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Payback Period |
4.56 |
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Profitability Index |
0.85 |
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Solution 5c
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Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Year 9 |
Year 10 |
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Operating Revenue |
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648,900 |
668,367 |
721,200 |
742,836 |
799,899 |
823,896 |
848,613 |
747,394 |
769,816 |
792,911 |
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Less loss of Revenue |
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92,700 |
95,481 |
120,200 |
123,806 |
150,706 |
155,227 |
159,884 |
126,677 |
130,477 |
134,392 |
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Less operating costs |
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123,600 |
127,308 |
131,127 |
135,061 |
139,113 |
143,286 |
2,607,333 |
152,012 |
156,573 |
161,270 |
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Operating profit |
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432,600 |
445,578 |
469,873 |
483,969 |
510,081 |
525,383 |
(1,918,603) |
468,705 |
482,766 |
497,249 |
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Less Depreciation Exp |
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525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
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Net Income before tax |
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(92,400) |
(79,422) |
(55,127) |
(41,031) |
(14,919) |
383 |
(2,443,603) |
(56,295) |
(42,234) |
(27,751) |
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Less Income Tax |
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(27,720) |
(23,827) |
(16,538) |
(12,309) |
(4,476) |
115 |
(733,081) |
(16,889) |
(12,670) |
(8,325) |
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Net Income after Tax |
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(64,680) |
(55,595) |
(38,589) |
(28,722) |
(10,444) |
268 |
(1,710,522) |
(39,407) |
(29,564) |
(19,426) |
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Add Depreciation |
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525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
525,000 |
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Operating ATCF |
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460,320 |
469,405 |
486,411 |
496,278 |
514,556 |
525,268 |
(1,185,522) |
485,593 |
495,436 |
505,574 |
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Working capital |
(100,000) |
(77,868) |
(80,204) |
(86,544) |
(89,140) |
(95,988) |
(98,868) |
(101,834) |
(89,687) |
(92,378) |
(95,149) |
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Change in Working Capital |
(100,000) |
22,132 |
(2,336) |
(6,340) |
(2,596) |
(6,848) |
(2,880) |
(2,966) |
12,146 |
(2,691) |
(2,771) |
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Operating ATCF |
(100,000) |
482,452 |
467,069 |
480,071 |
493,682 |
507,709 |
522,388 |
(1,188,488) |
497,740 |
492,746 |
597,952 |
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Initial Investment |
(2,000,000) |
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Terminal ATCF |
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56,000 |
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ATCF |
(2,100,000) |
482,452 |
467,069 |
480,071 |
493,682 |
507,709 |
522,388 |
(1,188,488) |
497,740 |
492,746 |
653,952 |
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Cum ATCF |
(2,100,000) |
482,452 |
949,521 |
1,429,591 |
1,923,273 |
2,430,982 |
2,953,371 |
1,764,882 |
2,262,622 |
2,755,368 |
3,409,320 |
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NPV |
(233,492) |
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IRR |
11.49% |
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Payback Period |
4.35 |
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Profitability Index |
0.89 |
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To export a reference to this article please select a referencing stye below:
My Assignment Help. (2021). Radiant Equipment Purchase Decision. Retrieved from https://myassignmenthelp.com/free-samples/corpfin1002-business-finance/current-detergents.html.
"Radiant Equipment Purchase Decision." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/corpfin1002-business-finance/current-detergents.html.
My Assignment Help (2021) Radiant Equipment Purchase Decision [Online]. Available from: https://myassignmenthelp.com/free-samples/corpfin1002-business-finance/current-detergents.html
[Accessed 23 April 2024].
My Assignment Help. 'Radiant Equipment Purchase Decision' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/corpfin1002-business-finance/current-detergents.html> accessed 23 April 2024.
My Assignment Help. Radiant Equipment Purchase Decision [Internet]. My Assignment Help. 2021 [cited 23 April 2024]. Available from: https://myassignmenthelp.com/free-samples/corpfin1002-business-finance/current-detergents.html.
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