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Questions:
1. On the basis of costs, would you recommend Radiant to purchase the specialised equipment and packaging facilities from Donnalley Limited or Danforth Limited? [You may assume both companies are able to supply the equipment on the same terms indefinitely.]

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. 
Answers:

1

Radiant should purchase the specialized equipment and packaging facilities from Donnalley Limited because it would be $2.6 million cheaper than

 

Danforth from a cost basis.

 

 

 

 

 

2a

No, the market testing cost is a sunk cost, hence it is not relevant to include into the future cash flows.

 

 

 

 

2b

No, the annual interest expense should be ignored because cost of financing is accounted for in the discount rate.

 

 

 

 

2c

Yes, the change in working capital is relevant and hence these cash flows should be recognized.

 

 

 

 

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.

 

 

 

 

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.

 

 

 

 

3

criterion

 

Decision

 

NPV

 $     (311,173)

<0; Reject

 

IRR

10.22%

< 15%; Reject

 

Payback Period

4.56

Accept <5 years

 

Profitability Index

0.85

< 1; Reject

 

 

 

 

 

Radiant should Reject the project

 

 

 

 

 

 

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

 

NPV basis, the project should be rejected on an isolation basis.

 

 

 

 

 

 

 

 

5a

 

 

VARIABLE: NET CASH FLOWS

   

 

 

 

   

Scenario

Cost of capital

NPV

   

-20%

15%

(668,938)

   

0%

15%

(311,173)

   

20%

15%

46,593

   

 

 

 

   

 

 

 

   

 

 

 

   

VARIABLE: COST OF CAPITAL

   

 

 

 

   

Scenario

Cost of capital

NPV

   

-20%

-5%

2,100,884

   

0%

15%

(311,173)

   

20%

35%

(1,017,432)

   

 

5b

 

Minimum -17%

 

 

5c

 

NPV -(233,492)

IRR-11.49%

Payback Period-4.35

Profitability Index-0.89

 

 

 

 

 

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

 

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.


CASH FLOWS 

 

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Operating Revenue

           630,000

           630,000

       660,000

      660,000

      690,000

    690,000

       690,000

       590,000

      590,000

      590,000

Less loss of Revenue

             90,000

             90,000

       110,000

      110,000

      130,000

    130,000

       130,000

       100,000

      100,000

      100,000

Less operating costs

           120,000

           120,000

       120,000

      120,000

      120,000

    120,000

    2,120,000

       120,000

      120,000

      120,000

Operating profit

 

           420,000

           420,000

       430,000

      430,000

      440,000

    440,000

  (1,560,000)

       370,000

      370,000

      370,000

Less Depreciation Exp

           525,000

           525,000

       525,000

      525,000

      525,000

    525,000

       525,000

       525,000

      525,000

      525,000

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)

Less Income Tax

 

           (31,500)

           (31,500)

       (28,500)

      (28,500)

       (25,500)

     (25,500)

     (625,500)

       (46,500)

       (46,500)

       (46,500)

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)

Add Depreciation

 

           525,000

           525,000

       525,000

      525,000

      525,000

    525,000

       525,000

       525,000

      525,000

      525,000

Operating ATCF

 

           451,500

           451,500

       458,500

      458,500

      465,500

    465,500

     (934,500)

       416,500

      416,500

      416,500

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

          (100,000)

           (75,600)

           (75,600)

       (79,200)

      (79,200)

       (82,800)

     (82,800)

       (82,800)

       (70,800)

       (70,800)

       (70,800)

Change in Working Capital

(100,000)

24,400

0

(3,600)

0

(3,600)

0

0

12,000

0

0

Operating ATCF

(100,000)

475,900

451,500

454,900

458,500

461,900

465,500

(934,500)

428,500

416,500

487,300

 

 

 

 

 

 

 

 

 

 

 

 

Initial Investment

(2,000,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Terminal ATCF

 

 

 

 

 

 

 

 

 

 

56,000

 

 

 

 

 

 

 

 

 

 

 

 

ATCF

(2,100,000)

475,900

451,500

454,900

458,500

461,900

465,500

(934,500)

428,500

416,500

543,300

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

 

 

 

 

 

 

 

 

 

 

 

 

 

NPV

(311,173)

 

 

 

 

 

 

 

 

 

 

IRR

10.22%

 

 

 

 

 

 

 

 

 

 

Payback Period

                4.56

 

 

 

 

 

 

 

 

 

 

Profitability Index

                0.85

 

 

 

 

 

 

 

 

 

 

Solution 5c

 

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Operating Revenue

 

          648,900

       668,367

        721,200

             742,836

      799,899

        823,896

            848,613

       747,394

        769,816

      792,911

Less loss of Revenue

 

            92,700

         95,481

        120,200

             123,806

      150,706

        155,227

            159,884

       126,677

        130,477

      134,392

Less operating costs

 

          123,600

       127,308

        131,127

             135,061

      139,113

        143,286

         2,607,333

       152,012

        156,573

      161,270

Operating profit

 

          432,600

       445,578

        469,873

             483,969

      510,081

        525,383

       (1,918,603)

       468,705

        482,766

      497,249

Less Depreciation Exp

 

          525,000

       525,000

        525,000

             525,000

      525,000

        525,000

            525,000

       525,000

        525,000

      525,000

Net Income before tax

 

           (92,400)

       (79,422)

        (55,127)

              (41,031)

       (14,919)

               383

       (2,443,603)

        (56,295)

         (42,234)

       (27,751)

Less Income Tax

 

           (27,720)

       (23,827)

        (16,538)

              (12,309)

         (4,476)

               115

          (733,081)

        (16,889)

         (12,670)

         (8,325)

Net Income after Tax

 

           (64,680)

       (55,595)

        (38,589)

              (28,722)

       (10,444)

               268

       (1,710,522)

        (39,407)

         (29,564)

       (19,426)

Add Depreciation

 

          525,000

       525,000

        525,000

             525,000

      525,000

        525,000

            525,000

       525,000

        525,000

      525,000

Operating ATCF

 

          460,320

       469,405

        486,411

             496,278

      514,556

        525,268

       (1,185,522)

       485,593

        495,436

      505,574

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

   (100,000)

           (77,868)

       (80,204)

        (86,544)

              (89,140)

       (95,988)

         (98,868)

          (101,834)

        (89,687)

         (92,378)

       (95,149)

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)

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

 

 

 

 

 

 

 

 

 

 

 

 

Initial Investment

(2,000,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Terminal ATCF

 

 

 

 

 

 

 

 

 

 

56,000

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

NPV

(233,492)

 

 

 

 

 

 

 

 

 

 

IRR

11.49%

 

 

 

 

 

 

 

 

 

 

Payback Period

          4.35

 

 

 

 

 

 

 

 

 

 

Profitability Index

          0.89

 

 

 

 

 

 

 

 

 

 
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My Assignment Help (2021) Radiant Equipment Purchase Decision [Online]. Available from: https://myassignmenthelp.com/free-samples/corpfin1002-business-finance/current-detergents.html
[Accessed 01 March 2024].

My Assignment Help. 'Radiant Equipment Purchase Decision' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/corpfin1002-business-finance/current-detergents.html> accessed 01 March 2024.

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