Discuss which costs are relevant for the evaluation of this project and which costs are not….

Your tasks:
Based on the information in the case study, Catherine has asked you to write a report to TMR’s management
advising them as to the best course of action regarding this project. Your report should address the following
specific questions asked by TMR’s management:
1. Discuss which costs are relevant for the evaluation of this project and which costs are not. Your
discussion should be justified by a valid argument and supported by references to appropriate sources
2. How are possible cannibalization and opportunity costs considered in this analysis?
3. Determine the initial investment cash flow.
4. Estimate all cash flows associated with the project over 5 years. It is assumed that where relevant,
capital expenditures and marking costs are expended throughout the year, while cash flows relating
to revenue and operating costs occur at the end of the year. You will need to broadly describe the
method used for determining those cash flows.
5. Calculate the project’s payback period. Assuming the business will continue at the end of year 5 so
ignore the possible terminal value of all assets (Car fleet and premises). Ignore the time value of
money for this particular calculation. Briefly comment on your results
6. Estimate the Net present value (NPV) of the project, assuming that the initial investment is entirely
funded by equity capital (retained earnings and new share issue). Assume further that the business
could be sold at the end of the five years for $1 million. This figure includes the value of the car fleet,
premises and capital gain from the business. Ignore any possible tax consequences of selling the
business. Briefly comment on your results and make appropriate remarks on the assumptions made
for these calculations if necessary.
7. Refer back to point 6, calculate the NPV of the project given that the project will be funded by 60%
of debt and 40% of equity. Briefly explain the calculation of discount rate. Comments on the change
in NPV between point 6 and point 7.
8. In view of your answer to Point 5 to point 7 above, advise TMR’s management as to whether they
should go ahead with the investment project. In your recommendations, you may wish to suggest
possible refinements in the method used for evaluating this project.


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