Question

Mann Co is a listed company. In past several months, the stock price of the Mann Co has continued to decline
due to operating losses, which makes the board of directors in face of great pressure. Mann Co’ board is
considering to invest in a new project to improve company's financial performance. According to the prediction
of the Mann Co’s financial manager, the new project life is expected to be 5 years. At the beginning of the
project, the sales volumes and selling price of the products are relatively high. In the later stage of the project,
with the entry of competitors, both the sales volume and unit price will decrease. The forecast sales volumes,
selling price, variable costs of the projects are as follows:
Year 1 2 3 4 5
Sales (units/year) 110000 120000 120000 100000 80000
Selling price ($/unit) 300 300 300 270 250
Variable cost ($/unit) 170 170 170 170 170
The equipment needed to begin production has an installed cost of $30 m and the tax law allows Mann Co
equipment depreciate to zero over 10 year using straight-line depreciation. Mann Co’s financial manager forecast
that this equipment can be sold for $2 m after completion of the project. In addition, production of the project
will require $1.5m in net working capital to start and additional new working capital investments each year equal
to 10% of the projected sales increase for the following years. The financial manager estimates that the annual
factory building rental and other fixed expenditures are about $2m for each year. The marginal tax rate of Mann
Co is 35% and the require return on the project is 12%.
Required:
(a). Calculate the after-tax salvage value of the equipment. (5 marks)
(b). Calculate the cash flow from asset for each year. (6 marks)
(c). Calculate the Net Present Value of the project. (4 marks)
(d). Calculate the Payback period of the project. (2 marks)
(e). Would you suggest Mann Co invest this project? Why? (3 marks)