Feasibility Study

Question 2:

Investment cost LE 20 millions to buy a factory that ready to operate and the residual value is LE 5 millions.

The current operating costs LE 10 millions (include LE 2 millions depreciation).

Quantity of annual sales LE 3 million units, Sales price per unit LE 5 (80% of sales cash and 20% on credit).

The Economic life is 5 years.

The tax rate is 20%.

The project will be financed from both owner's capital and loans 12 and 8 millions respectively, the dividends rate is 20%.

The loan will be paid back to the bank during the first 4 operating years (2 millions annually) with 10% annual interest rate of the declining balance.

Required:

1- Compute the annual accounting profit and the annual tax.

2- Compute the cash flow from the owner's view.

3- Compute the NPV and IRR then determine whether the project is viable or not.

Answer : The cash flow table:

|year |cash in flow |cash out flow |net cash |

| | | |flow |

|  |revenue |loan |residual |total |investment cost |

|Cash operating cost |10 |12 |14 |14 |14 |

|Depreciation |8 |8 |8 |8 |8 |

|Interest of the loan |3.75 |3 |2.25 |1.5 |0.75 |

|Annual cash revenue |22 |25 |30 |30 |30 |

|The residual value | | | | |15 |

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