QUESTION 4The directors of Raga Limited are considering a new business opportunity.This involves the purchase of machinery costing Rs 600,000.Units produced by the machine are expected to have a cash inflow of Rs 50 each and thecosts of production are expected to be Rs 31.10 per unit. There is also a fixed cost whichare expected to be Rs 120,000 per annum excluding depreciation.The machinery is expected to lose its value evenly over four years and then be scrapped.The directors expect to produce and sell 20,000 units each year.Raga Limited has a cost of capital of 10%.REQUIRED:Year(b) Calculate the annual profit.1234DiscountRate -10%0.909(a) Calculate the net cash flow for each year.0.8260.7510.683(c) Calculate the payback period for the machinery.(d) Using the answer in part (a) calculate the Net Present Value (NPV).(e) Using the answer in part (b) calculate ARR.(f) Based on the above advice Raga Limited if he should invest in the machinery usingvalid arguments.(g) Give one advantage and one disadvantage of the payback method.

The payback period refers to the period which is required to meet the initial investment with the…

Answered: The directors of Raga Limited are…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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