Chakngeny Diaries Ltd is considering investing in a new milk cooling system with the following characteristics:
A Initial Investment KES 7,360,000-no scrap value
B Expected Economic Life 5 years
C Sales Volume 1,120,000 litres per year
D Selling Price KES 15 per litre
E Variable Costs KES 11 per litre
F Fixed Costs including Depreciation KES 3,100,000 per year
The company’s opportunity cost of capital is 15% and it uses the straight line depreciation method. Its marginal tax rate is 40%.
Required:
a. Calculate the NPV (unadjusted for risk) of the project. (11 marks)
b. Recalculate the NPV assuming each of the characteristics, B, and D varies, in isolation, adversely by 10%. (12 marks)
c. Comment briefly on the vulnerability of the two variables in (b) above. (2 marks)
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