Discuss Which Costs Are Relevant For The Evaluation Of This Project And Which Costs 2942197

Your tasks:
Based on the information in the case study, Catherine has asked you to write a report to TMR’s management
advising them as to the best course of action regarding this project. Your report should address the following
specific questions asked by TMR’s management:
1. Discuss which costs are relevant for the evaluation of this project and which costs are not. Your
discussion should be justified by a valid argument and supported by references to appropriate sources
2. How are possible cannibalization and opportunity costs considered in this analysis?
3. Determine the initial investment cash flow.
4. Estimate all cash flows associated with the project over 5 years. It is assumed that where relevant,
capital expenditures and marking costs are expended throughout the year, while cash flows relating
to revenue and operating costs occur at the end of the year. You will need to broadly describe the
method used for determining those cash flows.
5. Calculate the project’s payback period. Assuming the business could be sold at the end of the five
years for $1 million. This figure includes the value of the car fleet, premises and capital gain from the
business. Ignore any possible tax consequences of selling the business and also ignore the time value
of money for this particular calculation. Briefly comment on your results
6. Estimate the Net present value (NPV) of the project, assuming that the initial investment is entirely
funded by equity capital (retained earnings and new share issue). could be sold at the end of the five
years for $1 million. This figure includes the value of the car fleet, premises and capital gain from the
business. Ignore any possible tax consequences of selling the business. Briefly comment on your
results and make appropriate remarks on the assumptions made for these calculations if necessary.
7. Using sensitivity analysis, recalculate NPV using the scenario of a decrease in project sales by 10%
annually. Briefly comment on your results.
8. In view of your answer to Point 5 to point 7 above, advise TMR’s management as to whether they
should go ahead with the investment project. In your recommendations, you may wish to suggest
possible refinements in the method used for evaluating this project.

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Prof. Angela

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