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NPV & IRR Question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › NPV & IRR Question

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • October 4, 2021 at 6:58 pm #636983
    attiebui311
    Member
    • Topics: 1
    • Replies: 0
    • ☆

    Please help me solve this question:

    CapPest Ltd is a privately held company that develops and manufactures conventional and synthetic pesticides for agricultural farming. Their mission is to enable farmers to extract high yields off scare agricultural land. The company currently manufactures a range of synthetic crop protection products such as insecticides, weedicides and fungicides for all crops types.

    The market for agricultural biologicals – biopesticides and biofertilizers, is growing rapidly as global agriculture looks to move towards more sustainable ways to boost yields and new methods of crop protection. Greater knowledge among farmers of the hazards of chemical fertilizers is also accelerating B&B market growth. CapPest is evaluating a strategy of setting up research and production facilities for biopesticides.

    A committee created to assess the project feasibility has collated the following forecasted investments, financing, cash flows and other relevant information.

    a Capital assets investment are estimated to be at $150 million. These include laboratory equipment and production facilities. This expenditure would have to be fully paid before commencement of production.

    b. These assets are expected to have 8-years useful life, when biotechnology equipment and techniques are expected to go obsolete. At the end of useful life, these assets are estimated to be sold for $3 million. The company has always adopted a straight-line depreciation policy over assets useful life to zero.

    c First year sales is projected to be $50 million, with annual increase of 10% over the next 8 years. Selling price per unit is $50 per litre.

    d To begin production, CapPest would require an increase in current asset of $500 000 (such as supplies acquisition). Current liabilities will also be expected to increase by $200 000. This working capital will be released at the end of the project’s life.

    e Annual fixed operating expenses is projected as per below.
    Year 1-3: Fixed operating expenses is $2 500 000
    Year 4-6: Fixed operating expenses is $3 500 000
    Year 7-8: Fixed operating expenses is $3 000 000

    Variable costs of production would be 30% of annual sales revenue. The cost of capital for this project is forecasted at 12%.

    CapPest pays a corporate tax rate of 20%. Capital gain on asset disposal is charged at corporate tax rate.

    What is the NPV and IRR of this investment? Should CapPest go ahead with this investment?

    October 6, 2021 at 8:35 pm #637162
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    I think that you’ve posted this question in the wrong forum. This is the FR one and it looks like you should be looking in FM.

    Thanks

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