Clean plc is specialists in providing on-site cleaning services to both commercial and residential customers. Jiffy Clean is considering a project that will introduce a new service for a period of five years and then be terminated. The owner of Jiffy Clean, Jason Smith, hired you as the business manager nearly six months ago. In that time, you have proven to be a very valuable employee and Mr. Smith respects your financial knowledge. He has informed you that a marketing research firm has been contracted to conduct a study regarding the feasibility of introducing the new product. The study, which cost £10,000, revealed the following information with regard to expected sales figures( attached excel file)
The new service would require the purchase of new equipment, totalling £220,000, which includes shipping and installation charges. The equipment is to be depreciated on a straight-line basis. Jiffy Clean is expected to have an additional £5,000 of fixed costs per year if the project is undertaken. Mr. Smith also expects that the net working capital will need to be increased by £5,000 now and will be equal to 10% of the monetary value of sales for years 1 through 4, with all working capital being full recovered at the end of the project (working capital will be zero at end of year 5). Jiffy Clean is in the 40% tax bracket.
Smith believes that he could get a 14% return on his money if it was not placed in this project. How to analyse the project and what the recommendation.
1. Using the financial information presented in the memo above, How to compute the net incremental cash flows for each period in order to compute an NPV for this project. .
2. Given the lack of knowledge that investor has regarding capital budgeting decisions, Howto explain why it is used incremental cash flows to analyse the viability of the project as well as how they are computed (i.e., what costs are not included, which costs are included, why they are discounted, etc).
3. How to Explain the need for the risk analysis regarding the project to the investors. And how to demonstrate the effect that changes can have on the profitability of the project by re-computing the project analysis to account for a 10% decrease in the sales forecast for commercial sales.
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