VIP Chemical Industries is looking to set up a new plant and expand its operations. The company currently has an option to buy an existing building for £480,000, with the necessary equipments to operate the plant costing £320,000. The initial working capital investment is £240,000.
The plant’s estimated economic life is four years. At the end of four years, the building is expected to have a market value of £300,000 and book value of £436,320. The equipment is expected to have market value of £80,000 and book value of £54,400.
The other available information is as follows:
Annual sales £1,600,000
Fixed costs (excluding depreciation) £200,000
Depreciation on building and equipment (Year 1 £70,240; Year 2 £114,880;
Year 3 £73,280; Year 4 £50,880)
Variable costs 60% of sales
Marginal tax rate 40%
Cost of capital 12%
Assume that operating cash flows occur at the end of each year.
The operations will begin immediately after the investment is made, and the first operating cash flows will happen exactly one year later.
Evaluate whether the project should be accepted or not using the net present value (NPV) and internal rate of return (IRR).
Airline companies often engage in jet fuel hedging. The notes to the financial statements section of the annual report, generally provides additional information about the hedging activities of a company.
Obtain the most recent annual report of an airline company which hedges its jet fuel requirements.
Prepare a report (maximum 1200 words) to evaluate the instruments used to mitigate the risk of rising fuel costs, and discuss the impact of jet fuel hedging on the financial statements of the airline company.