Georges and Jeanne have returned to Winnipeg largely for family reasons. They only have limited resources to invest and they have plans to start a family within the next few years.
They have agreed to assess the project viability of the boat manufacturing venture. Assuming that the project is viable, they would prepare a business plan and help Francois secure financing for the new business.
They would make assumptions as follows to develop the necessary projections required for the viability assessment:
- Project life 9 years
- At the end of the 9 year project life, the remaining manufacturing and other equipment would be sold for $100,000.
- Tax consequences at the end of the project life would need to be considered
- Working Capital would be set of $180,000 for the duration of the project
- Inflation would be ignored
- A hurdle rate of 20% would be used for viability assessment based on advice received from Maurice; this rate reflects a weighted cost5
of capital assessment based upon current market rates
- Manitoba tax credits may be available for this project but these are to be ignored in the analysis
Develop a 9 year cash flow model covering the project for the years 2013-2021.
Determine the following measures from the model developed for item (1):
(a) Project NPV
(b) Project IRR
(c) Project Profitability Index
(d) Payback Period
(e) Is the project financially justified?
Determine the effects on the measures on (2) by examining an alternative scenario for capital expenditures (An exchange rate of €1.00 = C$1.60 and a price of €650,000 from the French equipment vendor). You may determine the required result for this question either by producing a separate spreadsheet or by using another feature in Excel such as data tables
Discuss the viability of the expansion project by reviewing all assumptions and risks that you think are relevant together with the results from the answers to questions one through three.
Aim to make your answer as comprehensive as possible.