Company A Plans To Invest In The Production Of Refractory Bricks. Equipment And Factory Are Invested Once. Project Life Cycle Follows The Depreciation Time Of Equipment. Total Investment Of The Project Is Owner’s Equity. Investment In Factory Is 2,300,000,000. Equipment Is As Follows:
Variable cost per ton of finished brick: Cost of raw materials is 910,000; Direct labor cost is 345,000; Workshop cost is 200,000; The other cost is 150,000. The fixed cost of management (excluding depreciation) for one year is VND 350 million. Depreciation of equipment for a period of 5 years. Depreciation of the factory for a period of 7 years. Net liquidation price of the factory is equal to 90% of the remaining value. The liquidation price of machinery and equipment is negligible. Production and consumption capacity is expected to be 2010 tons/year, of which the volume in the first year is 80% of the capacity, the volume in the second year is 90% of the capacity, from the third year, the volume is 100% of the capacity. Selling price is 2,890,000 / ton (without VAT). Corporate income tax 20%. Required:
a) Prepare the income statement of the project. b)Calculates the net cash flow of the project each year (ignoring VAT).
c)Calculates the NPV of the project with an average annual cost of equity of 12%.
EXPERT ANSWER
a) income statement for the project
Particulars Year-1. Year-2. Y-3&on
production 1608. 1809. 2010
Sales 4647.12 5228.01 5808.9
variable cost:
Direct materials 1463.28 1646.19 1829.1
Direct labor. 554.76. 624.11. 693.45
Workshop cost. 321.6. 361.8. 402
other cost. 241.2. 271.35. 301.5
Fixed cost 350. 350. 350
depreciation.
factory. 295.71. 295.71. 295.71
equipment 743.8 743.8 743.8
Profit 676.77 935.05 1193.34
Tax @20% 135.35. 187.01. 238.67
profit after tax. 541.42. 748.04. 954.67
working note- depreciation
factory -23000,00,000
useful life -7 years
resudual value -10% of cost
depreciation = 2300000000-10%\7 years
= 295.71
equipmentt- 3719000000/5 years
= 743.8
b) Net cash flow of the project
Particulars. Year-1. Year-2. Y-3&on
profit after tax 541.42. 748.04. 954.67
Add:
depreciation 1039.51 1039.51 1039.51
(non -cash item)
Cash flows. 1580.93. 1787.55. 1994.18
c) Net present value for the project:
particulars Year -1. Year-2. Y-3&on
cash inflows. 1580.93. 1787.55. 1994.18
Discounting factor@12% 0.89286. 0.79719. 2.40183
discounted cashflows. 1411.55. 1425.02. 4789.68
Total cash inflows 7626.25 + 1305.08(residual value of machinery – 2300*0.5674)= 8931.33
cash outflows. 6019(2300+3719)
Net present value = 2912.33