NPV 0 1 2 3 4

$000 $000 $000 $000 $000

Sales revenue(W1) 13250 16695 22788.68 23928.11

Variable costs(W2) -5787.6 -7292.376 -9954.093 -10451.8
Contribution 0 7462.4 9402.624 12834.58 13476.31
Marketing expenditure -1500
Fixed costs -900 -945 -992.25 -1041.863
Tax allowable depreciation(W3) -3200 -2560 -2048 -8192
Taxable profits(losses) 1862.4 5897.624 9794.332 4242.448
Taxation (25%) -465.6 -1474.406 -2448.583 -1060.612
Addback tax allowable depreciation 3200 2560 2048 8192
Cash flows after tax 4596.8 6983.218 9393.749 11373.84
Initial Investment -16000
Working Capital -1025 -41 -53.3 -55.965 1175.265
Net cash flows -17025 4555.8 6929.918 9337.784 12549.1
Discount factor 1 0.901 0.812 0.731 0.659
Present Values -17025 4104.32 5624.48 6827.71 8266.48

Net Present value 7797.99

As we can see from the analysis, the NPV of the investment in the Milland is $7.8 m .
This represents an increase in shareholder wealth, and tells us that the project delivers a return in exce
On this basis, the investment should proceed.

Duration

Year 1 2 3 4
Preset values 4104.32 5624.48 6827.71 8266.48
PV * year 4104.324 11248.95 20483.12 33065.93
Total pv * years 68902.33
Total pv of inflows 24822.99
Duration 2.78 years

Comment on the duration

The project duration is 2.78 years- this is a measure of the average time taken for
Milland to deliver its value. It is therefore comparable with a project that delivers 100%
of its value in 2.78 years.
W1 Sales revenue
1 2 3 4
Units 132500 159000 206700 206700
selling price 100 105 110.25 115.7625
Total revenue($000s) 13250 16695 22788.68 23928.11

W2 Variable cost

Units 132500 159000 206700 206700

vc per unit 43.68 45.864 48.1572 50.56506
Total VC ($000S) 5787.6 7292.376 9954.093 10451.8

W3 Tax Allowable Depreciation

$000
NCA 16000
Year 1 20% -3200
WDV 12800
Year 2 20% -2560
10240
Year 3 20% -2048
8192
Year 4 Bal allowance -8192
Residual 0

W4 Working Capital (end of yr 1 = start of yr 2)

Inflation 4% 5% 5% 5%
0 1 2 3 4
Requirement 1025 1066 1119.3 1175.265
Casflow -1025 -41 -53.3 -55.965 1175.265
(b)

Sensitivity to selling price

Discounted sales revenue cashflows

1 2 3 4
Revenue 13250 16695 22789 23928
Tax 25% -3312.5 -4173.75 -5697.25 -5982
Post tax revenue 9937.5 12521.25 17091.75 17946
DF 11% 0.901 0.812 0.731 0.659
PV 8952.7 10162.53 12497.34 11821.59
Total PV of revenue 43434.2

Sensitivity margin % NPV of project

PV of cashflow under consideration

NPV of project * 100% 7798 *100% 18%

PV of post -tax revenue 43434.16

This project has a sensitivity to selling price of 18%.

This means that Fernhurst could tolerate a fall in the
selling price of the Milland of 18% before the project
NPV falls below zero.
It is likely that the selling price of the Milland has been
set fairly high, to reflect the technological advancements
and uniqueness of the project. It is therefore, that a planned
reduction in the selling will be possible, without affecting
the quality perception of the product launch.

Whilst the FD anticipates a potential loss of $1 m in year 1 , it may

well be that a small reduction in the selling price would boost demand.
Fernhurst may find that it doesn't have to reduce the SP by 18%,
inorder to avoid this potential loss. A boost in demand as a result of
a price drop may well increase revenue how elastic the demand is.