A Food Company is considering a project proposal for a newly formulated food product, AA. The initial fixed capital investment is GHC 18,000,000 and the working capital is GHC 2,000,000. The plant can process 72,000 kg of food in an hour, and will operate 4,000 hours per year. The expected annual expenses (excluding depreciation costs) is GHC 6,000,000 per year. The plant is expected to have a service life of ten years. The depreciation is GHC 1,500, 000. The tax rate is 25%. If the required annual rate of return after tax (hurdle rate) is 18%, calculate the minimum amount the food company should charge per customer per kilogram of food product, AA. (A) using the return on initial investment method (B) using the NPV method

A Food Company is considering a project proposal for a newly formulated food product, AA. The initial fixed capital investment is GHC 18,000,000 and the working capital is GHC 2,000,000. The plant can process 72,000 kg of food in an hour, and will operate 4,000 hours per year. The expected annual expenses (excluding depreciation costs) is GHC 6,000,000 per year. The plant is expected to have a service life of ten years. The depreciation is GHC 1,500, 000. The tax rate is 25%. If the required annual rate of return after tax (hurdle rate) is 18%, calculate the minimum amount the food company should charge per customer per kilogram of food product, AA. (A) using the return on initial investment method (B) using the NPV method

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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