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$Billion
1.2
1.1
1.5
4.0
1.0
13.05
Plant and equipment can be depreciated on a straight-line basis over the life of the
project. It has no salvage value.
Mr Tony Stark is also considering another new product named IRON MAIDEN.
Market research and factory conversion studies were $77 Million and $90 Million
respectively. Financing costs for the factory conversion are calculated at a bank
borrowing interest rate of 10% p.a.
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Prepared by LM
IRON MAIDEN
STARKs Director of Engineering, Abe Klein estimates that it can produce and sell
one IRON MAIDEN per year for the next 5 years, at which point, IRON MAIDEN
becomes obsolete.
The costs are as follows:
Item
Operating costs each year
Plant and equipment (purchased in year 0)
Working capital (required in year 0 and repaid in year 5)
Start-up (required in year 0)
Fixed costs each year
Selling price if each unit
$Billion
1.0
1.0
1.5
5.0
1.0
14.029
Plant and equipment can be depreciated on a straight-line basis over the life of the
project. It has no salvage value.
_____________________________________________________________________
The following information is applicable to both IRON WOMAN and IRON
MAIDEN.
Required:
Question 1. You are required to calculate the NPV ($), IRR (%) and Payback
(months) for both new products. Answers must be to two decimal places. Show all
workings. (48 marks)
Question 2. Which project should Tony Stark adopt? Justify your answer. (5 marks)
(100 word limit)
Question 3. Based on your recommendation in Question 2 (above), Tony Stark would
like to finance the new product by selling Bonds to the market. The bonds are named
IRON BONDS. Using the total costs in year 0 as the total cost of borrowing for the
issue, calculate the market price on issue if the market required rate of return on issue
is 10% p.a.? IRON BONDS pay a coupon rate of interest of 9% p.a. paid semiannually. The IRON BOND is due to mature in 5 years. Answers must be to two
decimal places. Show all workings. (7 marks)
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