The directors are contemplating diversification in 2024 by entering the passenger transport market. This could be achieved through the purchase of a fleet of midi buses that are expected to cost R9 500 000. An additional R500 000 will be spent on import duties. The cost of operating the buses each year is expected to be R4 100 000 and the annual revenues from transporting the passengers are estimated at R7 000 000. The buses are expected to have a total salvage value of R1 000 000 and the estimated useful life of the buses is five years. The company’s cost of capital is expected to reduce to 15%. Depreciation is calculated using the straight-line method. 1.1 Calculate NPV 1.2 Calculate IRR

The directors are contemplating diversification in 2024 by entering the passenger transport market. This could be achieved through the purchase of a fleet of midi buses that are expected to cost R9 500 000. An additional R500 000 will be spent on import duties. The cost of operating the buses each year is expected to be R4 100 000 and the annual revenues from transporting the passengers are estimated at R7 000 000. The buses are expected to have a total salvage value of R1 000 000 and the estimated useful life of the buses is five years. The company’s cost of capital is expected to reduce to 15%. Depreciation is calculated using the straight-line method. 1.1 Calculate NPV 1.2 Calculate IRR

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

See similar textbooks

Similar questions

A company is building a distribution centre, with investment cost (year zero) of €200 million and present value (year zero) of cash flows of €180 million. However, the company has the option to sell this distribution centre at the end of next year. The company estimates that the market value of the distribution centre, within 1 year, will be €240 million if the market evolves favourably, and €120 million if the market evolves unfavourably. The risk- free interest rate is 2% per year and the project gross value is assumed to follow a multiplicative binomial process. The market value of the shadow asset is given by S. Currently S = 12 and the estimation is that, within 1 year, S = 19 and S = 7 for the scenarios of favourable and unfavourable market evolution, respectively. b. What is the expanded NPV of the project? Explain your answer.
Kako Ltd is considering introducing a new product unto the market. This will require the injection of capital to the tune of GH¢20,000 for the purchase of the equipment for production. The cost of the building that Kako Ltd intends to use for the project is GH¢30,000. The Production and Marketing department has presented the information in the table below: 2019 Variable cost per unit of the product GH¢2 Selling price per unit GH¢6 Quantity 4000 units per annum Again the following information should be taken not of: • Feasibility studies cost the company GH¢2000 • Test marketing expenses amounts to GH¢3000 • Variable cost will increase by 5% per annum • Selling price will increase by 10% per annum • Marketing expense will be 5% of sales revenue per year • An initial working capital investment of GH¢2000 will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final…
A toy maker is considering whether to launch a new robotic dinosaur. Production requires an initial investment of £50m in year 0. The project is expected to be operational in years 1-3. In year 4, it will be possible to recover £10m of the initial investment by converting production facilities. Sales of the toy robot are expected to be £30m in year 1, £40m in year 2, and £50m in year 3. Operating costs are assumed to be £15m in each of years 1-3. The value of goods in the inventory in each of years 1-3 is estimated to be equal to 10% of the value of sales. The accumulated inventory will be entirely sold in year 4. Assume for simplicity that all cash flows (including working capital investments) occur at the end of the year. Assume also no taxes, a 3% risk free rate, a 6% market risk premium, and that the toy maker's equity has a beta equal to 1.5.a) Assuming that the toy maker is 100% equity financed, determine the NPV of the project.b) Assume now that the toy maker has a debt to…
During 2022 the management of Capri Limited considered the acquisition a new machine for purchase and installation during the second quarter of 2024 with a desired rate of return of 15%. The machine will cost R6 000 000 excluding import duties of R250 000 and will have a useful life of five years. The machine is expected to increase cash inflows by R2 000 000 per year but cash expenses will increase by R300 000 per year. Refer to the proposed acquisition of a new machine for purchase and installation during the second quarter of 2024 and answer the following questions: Calculate the Payback Period (expressed in years, months and days) Calculate the Accounting Rate of Return on initial investment (expressed to two decimal places). Calculate the Internal Rate of Return (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. Calculate the Net Present Value if the machine is expected to have a…
Sentra Limited has identified a new machine that it is considering for purchase during 2024. The machine would cost R1 000 000, excluding installation costs of R200 000. The machine is expected to have a useful life of five years and depreciation per year is estimated at R220 000. It is expected that the new machine would generate cash receipts of R540 000 per year and its annual cash outflows would total R220 000. At the end of year 3, the machine would require a major overhaul costing R200 000 cash (not included in the figures above). A scrap value of R100 000 (not included in the figures above) is anticipated. The cost of capital is 15%. Calculate the Net Present Value. (Use only present value table 1 discount factors from the module guide to calculate the present values of the net cash flows.).
XXXX Contractors are preparing to replace critical earthmoving plants and equipment so that they can consolidate future bids. The anticipated cost of the digger with a maximum-sized bucket is £85,000. It needs to be bought in 4 years’ time. However, the industrial development fund is willing to loan XXXX contractors at a rate of 12% per annum if they can purchase the digger today. The accountant thinks there is a possibility of outright purchase of the digger in 4 years’ time if the company can create a sinking fund at a rate of 6% per annum Task: Explain how the financial health of XXXX contractors is able to influence the decision of outright purchase using a loan today or the creation of a sinking fund for the next 4 years
The company are considering selling their old machine that has a capital cost of £260 000 and replacing it with an up-to-date model costing £220 000. For immediate purchase the company will receive £120 000-part exchange allowance. Both the current and new machines are able to meet the expected company demand, estimated at: Year Units 1 90 000 2 50 000 3 30 000 After three years, it is predicted that demand will be zero due to the technological developments in the industry. The following data has been provided for the existing and new machine: Current Machine £ per unit New Machine £ per unit Direct Materials 1.80 1.80 Direct Labour 0.75 0.60 Variable Overheads 0.45 0.30 Depreciation 0.35 0.55 Additional information The selling price for each component is £5.00 and this will remain constant for the next three years. The company expect the cost of direct materials and direct labour to increase by…
Company X has a plant producing mountain bikes. The plant’s current operations are estimated to generate a £10m cash flow per year(in perpetuity). The company is considering the option to halt the production of mountain bikes and invest £100m to reconvert the plant to produce electric bikes. This is estimated to increase total company cash flows from £10m to £20m per year in perpetuity. Assuming a 10% discount rate, the NPV of this project is A. £110m B. £0 C. £200m D. £10m
A company is considering a project. The project requires new machinery at a cost of £140,000 which is expected to have a resale value of £40,000 at the end. Depreciation of £20,000 is to be charged each year. The expected cash flows from the project are as follows: Year 1 (£12,890) Year 2 £26,500 Year 3 £39,750 Year 4 £78,231 Year 5 £68,090 The above cash flows are also considered to be representative of profit before depreciation. What is the accounting rate of return of the project (using average investment)? a. 81% b. 45% c. 59% d. 22%
FNV Industries is considering the purchase of a new processing machine. The initial cost of the machine will be $246,410. The expected increase in net cash inflow as a result of the purchase is: $90,666 for the first year, $73,107 for the second year The machine will have a salvage value of $0 at the end of the second year. Assume that all cash inflows are received at the end of the year. At a discount rate of 6%, what is the net present value of the machine? Round your answer to the nearest whole dollar.
Neptune company plans to purchase a new machine for the expansion project. The machine’s price is RM200,000 and it would cost another RM20,000 for installation and RM 15,000 for net working capital. The company is planning to finance the machine’s cost through bank loan with an interest rate of 8% per year. The machine has an expected life of 10 years and will be depreciated using simplified straight line depreciation method. However, the project is expected to be ended in year seven. The company expect that this new machine would increase the company’s annual income of RM40,000 per year. The maintenance cost for the machine will be RM10,000 per year. Additionally, the use of this new machine is expected to reduce the defect cost by RM2,000 per year. At the end of year 7, this machine is expected to be sold at RM30,000. Assuming the tax rate is 28% and the required rate of return is 10%, find whether ABC should proceed with this planning. Justify your answer.
The proposal is for a warehouse costing P100 million. The warehouse has an expected useful life of 35 years and a net salvage value (net proceeds from sale after tax adjustments) of P25 million. Annual receipts (cash inflow) of P17 million are expected, annual maintenance and administrative costs will be P4 million, and annual income taxes are P2 million. Given these data, which of the following statements below is (are) correct? Select one: O a. The proposal has a net present worth of P62.73 million when 6% is used as the interest rate. o b. The proposal is justified for a MARR of 9% O c. All statements are correct. o d. The proposal is acceptable as long as the MARR < 10.77%.