Your company needs to take another capital budgeting consideration regarding expansion of seafood product market. Your Financial Team was assigned the job to evaluate the potential risks of a new project. In the new project, the company will launch a new product line that is expected to boost the sales by 10%. The new project is expected to generate an annual sale of 3,500,000 units for an average price of $3.50 per unit for 5 years. The new investment project requires your company to buy a new assembly line with initial cost of $1,250,000, a residual value of $250,000 at the end of the project. The company will need to add $160,000 in working capital which is expected to be fully retrieved at the end of the project. Other information is available below: Depreciation method: straight line
Case Study: Your company needs to take another capital budgeting consideration regarding
expansion of seafood product market. Your Financial Team was assigned the job to evaluate the
potential risks of a new project. In the new project, the company will launch a new product line that
is expected to boost the sales by 10%. The new project is expected to generate an annual sale of
3,500,000 units for an average price of $3.50 per unit for 5 years. The new investment project
requires your company to buy a new assembly line with initial cost of $1,250,000, a residual value
of $250,000 at the end of the project. The company will need to add $160,000 in working capital
which is expected to be fully retrieved at the end of the project. Other information is available
below:
Variable cost per unit: $1.2
Cash fixed costs per year: $50,000
Corporate marginal tax: 30%
Discount rate:11%
Your Finance Department conducted some economics
time, post-Covid-19 pandemic and Russia- Ukraine war economic conditions may cause uncertainty
in canned seafood market demand. You Finance Department decides to do a scenario analysis to
determine the sensitivity of the project’s
Work on two scenarios corresponding to the worst- and best-case outcomes that are defined in
terms of the estimated values for each value driver of the project. You need to provide your results
in (a) relevant tables:
Worst case: The Covid-19 pandemic is totally over. People despise canned foods as it reminds them
of eating home alone under lockdowns and restriction. Your company’s new canned seafood
product is therefore subject to a decrease in market demand. More expensive energy due to RussiaUkraine war adds another pressure on production. The unfavourable economic condition causes:
Unit sales decrease by 10%; price per unit decreases by 10%; variable cost per unit increases by 10
%; cash fixed cost per year increases by 10%
Best case: The pandemic is gone. However, people are still concerned about its coming back and the
natural disasters such as floods in Queensland and New South Wales in early 2022. They developed
the habit to buy canned foods as a compulsory part of their emergency survival kits. Hence a strong
market demand on your company’s new canned seafood product is maintained. Russia- Ukraine
war is over after negotiations and the shortage of energy no longer persists. The favourable
economic condition makes: Unit sales increase by 10%; price per unit increases by 10%; variable
cost per unit decreases by 10%; cash fixed cost per year decreases by 10%.
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