31 Jan The board of directors of Sun
Show all workings.
Sun Solar Ltd produces solar panels for the Australian residential market. Due to high demand for solar panels they have decided to extend their installation services to include batteries which store the energy captured by the panels. Sun Solar has made the following projections:
i. In the first year they expect 5,000 units to be sold. The number of units sold is expected to grow at 15% per annum.
ii. The price for each unit in the first year will be AU$12,000. It is expected that this price will grow by 5% each year.
iii. The variable costs will be 70% of the sale price year on year.
iv. Fixed costs are $3,000,000 for the first year and will increase by 2% per annum.
v. The project term is four years.
vi. This project will require an initial investment of $56,000,000.
vii. This will be depreciated straight line to zero.
viii. Salvage value will be $8,000,000
ix. Working capital is $1,500,000.
x. Tax rate is 30%
xi. Required rate of return is 10%.
xii. Required payback is 3 years.
Question 1 [25 marks]
Use the above details to prepare an Excel spreadsheet calculating the following using the following headings.
Accounting item
Year 0
Year 1
Year 2
Year 3
Year 4
a. After-tax cash flows. (15 marks)
b. Payback period. (3 marks)
c. Net present value. (5 marks)
d. Profitability Index (2 marks)
Question 2 (10 marks)
From your findings in Question 1, you are asked to present a report on your findings regarding this project. Make a recommendation to management on whether they should proceed with the project or not. Explain the criteria on which you have based your decision.
Question 3 (5 marks)
It has come to your attention that revenue may flatten to 0% growth due to increased competition. However, variable costs would continue to grow by 5% per annum. Would you recommend the company proceeds with the project? (Show calculations)
Question 4 (10 marks)
The board of directors of Sun Solar are considering another possible investment which involves branching into solar operated cars. The life of the project will be six years, two years more than the battery project from question 1. They are not able to proceed with both investments. Explain how the financial managers would evaluate both projects of unequal lives.
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