purchase evaluation

Wolf Plc is evaluating the purchase of new equipment for a new product line. The following project related information is available:

Initial investment £ 650,000.00

Expected life 10 years

Residual value 0

Sales volume 50,000 units

Sales price £ 9.00

Variable cost £ 5.00

Fixed costs £ 60,000.00

Cost of capital 15%

Required:

a) Calculate the net present value (NPV) of the project and advise accordingly.

(5 marks)

b) Assess the sensitivity of the purchase evaluation to a change in expected price of the project.

(6 marks)

c) Assess the sensitivity of the purchase evaluation to a change in sales life of the project.

(6 marks)

d) If Wolf Plc could sell the equipment for £50,000 in year 10, how would this change you answer to part (a)?

(3 marks)

e) Briefly discuss other methods that a company could use in order to take account of the risk of the investment project.