Rare Agri-Products Ltd. is considering a new project with a projected
life of seven (7) years. The project falls under the government’s
subsidy program for encouraging local agricultural products and is
eligible for a one-time rebate of 25% on any initial equipment
installed for the project. The initial equipment (IE) will cost
$41,000,000. At the end of year 1, An additional equipment (AE) costing
$3,500,000 will be needed at the end of year 3. At the end of seven
(7) years, the original equipment, IE, will have no resale value but
the supplementary equipment, AE, can be sold for $50,000. A working
capital of $1,350,000 will be needed.
The project is
seven years as follows:
Year 1 70,000 units
Year 2 100,000 units
Years 3-5 250,000 units
Years 6-7 325,000 units
A sale price of $150 per unit for the first two years is expected and
then decline to $90 per unit thereafter as the newness of the product
loses some sheen. The variable expenses will amount to 30% of sales
revenue. Fixed cash operating expenses will amount to $1,100,000 per
year.
The company falls in the 25% tax category for ordinary income and 40%
tax category for capital gain.
The initial equipment is
and the additional equipment is depreciated on a straight-line basis.
In the event of a negative taxable income, the tax is computed as
usual and is reported as a negative number, indicating a reduction in
loss after tax.
The initial financing of the project will be carried out as follows:-
55% equity and 45% debt. The company paid $1.50 per share in the form
of dividend this year, which is likely to increase at a rate of 3%
per year for the near future. The current price of the company’s stock
is $9.50 per share. The bank loan is likely to be arranged at an
interest rate of 13.5% p.a.
You are required to:
Compute the NPV and IRR by showing all workings (not in excel format)
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- Rare Agri-Products Ltd. is considering a new project with a projected life of seven (7) years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7) years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed. The project is forecast to generate sales of agri-products over the seven years as follows: Year 1 Year 2 Years 3-5 Years 6-7 70,000 units 100,000 units 250,000 units 325,000 units A sale price of $150 per unit for the first two years is expected and then decline to $90 per unit thereafter as the newness of the product loses some sheen. The variable expenses will amount…arrow_forwardRare Agri-Products Ltd. is considering a new project with a projected life of seven (7)years. The project falls under the government’s subsidy program for encouraging local agricultural products and is eligible for a one-time rebate of 25% on any initial equipment installed for the project. The initial equipment (IE) will cost $41,000,000. At the end of year 1, An additional equipment (AE) costing $3,500,000 will be needed at the end of year 3. At the end of seven (7)years, the original equipment, IE, will have no resale value but the supplementary equipment, AE, can be sold for $50,000. A working capital of $1,350,000 will be needed.The project is forecast to generate sales of agri-products over the seven years as follows:Year 170,000 unitsYear 2100,000 unitsYears 3-5250,000 unitsYears 6-7325,000 unitsA sale price of $150per unitfor the first two years is expected and then decline to $90 per unitthereafter as the newness of the product loses some…arrow_forwardA government-funded wind-based electric power generation company in the southern part of the country has developed the following estimates (in $1000) for a new turbine farm. The MARR is 10% per year and the project life is 25 years. Benefits: $45,000 in year 0; $26,500 in year 5Government savings: $2,000 in years 1 through 20Cost: $46,000 in year 0Disbenefits: $3000 in years 1 through 10 NOTE: This is a multi-part question. Once an answer is submitted, you will be unable to return to this part.Calculate the conventional B/C ratio. The conventional B/C ratio is .arrow_forward
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