# Calculate the internal rate of return for the product

BIG Pharmaceuticals Ltd. has invested \$300,000 to date in developing a new type of insect repellent. The repellent is now ready for production and sale, and the Marketing Manager estimates that the product will sell 160,000 bottles in the first year, 210,000 bottles in the second years and 260,000 bottles a year over the next three years. The selling price of the insect repellent will be \$6.00 a bottle and variable costs are estimated to be \$3.00 a bottle. Second- and third-year price will be \$6.99 a bottle with a variable cost of \$3.50 a bottle, Fourth- and fifth year selling price will be \$7.95 with a variable cost of \$3.75. Fixed costs (excluding amortization) are expected to be \$210,000 a year. The figure is made up of \$165,000 additional fixed costs and \$45,000 fixed costs relating to the existing business that will be apportioned to the new business. These costs will increase by 5% each year.To produce the repellent, machinery and equipment costing \$650,000 will have to be purchased immediately. The estimated residual (salvage) value of this machinery and equipment in five years’ time is \$150,000. The business calculates depreciation following CCA rules.The business has a cost of capital of 1%. CCA 30% (50% rule applicable) of depreciation will be used, and taxes are paid at a rate of 35%.

Required:

Create a cash flow statement for the product for the next 5 years

Calculate the net present value of the product.

Calculate the internal rate of return for the product.

Undertake sensitivity analysis to show how much the following factors would have to change before the product ceased to be worthwhile.The initial cost of machinery and equipmentOperating costs – FixedOperating costs – variablePrice per bottle of repellentThe residual value of the machinery and equipment

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