1) XYZ Ltd. has decided to diversity its production and wantsto invest its surplus funds on the most profitable project.It has under consideration only two projects - "A" and "B".The cost of project "A" is Rs. 100 lacs and that of "B" is Rs.10 lacs. Both projects are expected to have a life of 8 yearsonly and at the end of this period "A" will have a salvagevalue of Rs. 4 lacs and "B" Rs. 14 lacs. The running expensesof "A" will be Rs. 35 lacs per year and that of "B" Rs. 20 lacsper year. In either case the company expects a rate ofreturn of 10%. The company's tax rate is 50%. Depreciationis charged on straight line basis. Which project should becompany take up?

Net present value is the important method of capital budgeting based on time value of money and net…

Answered: XYZ Ltd. has decided to diversity its…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Normally, JC Corporation pursue a project only if the payback period is not more than 50% of the project's useful life. However the accounting manager suggested that investment decision should not be based only on payback period. Currently, the company is considering to purchase a new machine that will provide annual cash flow of P1,500,000 in the first year of use, P1,200,000 in its second year of use, P1,000,000 in the third year, and P740,000 in each year of the remaining of 8 years life of the project. The machine cost P5,600,000 and could be sold for P2,500,000 after its useful life. The company's cost of capital is 12%. As the investment analyst of the company which of the Payback Method and the Present Value Method would you recommend to become the basis for pursuing the project? Explain your answers. Support your recommendation with computed values.
. A is considering the purchase of two alternative machinery. Machine 1 has an expected life of 5 years, will cost Rs. 100 lacs, and will produce net cash flows of Rs.30 lacs per year. Machine 2 has a life of 10 years, will cost Rs.140 million, and will produce net cash flows of Rs.25 million per year. It plans to use the chosen machine for only 10 years. Inflation in operating costs, machinery costs, is expected to be zero, and the company’s cost of capital is 12%. Which machine is acceptable as the better project? What is the equivalent annual annuity cost for each machine and by this criterion, which machine is acceptable?
Tiffany Co. is analyzing two projects for the future. Assume that only one project can be selected. Project Y Project X Cost of machine P680,000 P600,000 Net cash flow: Year 1 240,000 40,000 Year 2 240,000 260,000 Year 3 240,000 260,000 Year 4 0 200,000 If the company is using the payback period method and it requires a payback of three years or less, which project should be selected? Group of answer choices Project Y. Project Y because it has a lower initial investment. Both X and Y are acceptable projects. Project X. Neither X nor Y is an acceptable project.
NUBD Co. has an opportunity to acquire a new machine to replace one of its present machines. The new machine would cost P90,000, have a five year life, and no estimated salvage value. Variable operating costs would be P100,000 per year. The present machine has a book value of P50,000 and a remaining life of five years. Its disposal value now is P5,000, but it would be zero after five years. Variable operating costs would be P125,000 per year. Ignore present value calculations and income taxes. Considering the five years in total, what would be the difference in profit before income taxes by acquiring the new machine as opposed to retaining the present one?
Fox Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Unit sales Sales price Variable cost per unit Fixed operating costs This project will require an investment of $15,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project's four-year life. Fox pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be under the new tax law. O $20,571.03 O $27,428.04 O $26,285.20 O $22,856.70 Which of the following most closely approximates what the project's net present value (NPV) would be under the new tax law?(Hint: Round your final answer to two decimal places and choose the value that most closely matches your answer.) Year 1 Year 2 Year 3 3,000 3,250 3,300 $17.25…
Coronado, Inc. is considering purchasing equipment costing $39000 with a 7-year useful life. The equipment will provide cost savings of $8700 and will be depreciated straight-line over its useful life with no salvage value. Coronado Inc. requires a 9% rate of return. What is the approximate internal rate of return for this investment? Period 7 10% O 11% 000 9% 8% 7% 5.389 8% Present Value of an Annuity of 1 5.206 9% 5.033 10% 4.868 11% 4.712 14% 4.288
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.
Terminal Ltd purchased a machine at R80 000 two years ago. This machine can be replaced with a new machine at a cost of R100 000. The new machine can be sold for R30 000 after completion of a 5-year project. The old machine can be sold for R15 000 today. The SARS capital allowance on both machines is calculated at 20% per year. Net working capital will decrease with R1 500 at the end of the project life. Assume a tax rate of 28%. What is the net cash flow of the project in year 5? R20 100 R21 600 R30 000 R28 500 R8 400
It is estimated that an investment alternative with an initial investment cost of 250000 TL will generate annual revenues of 85000 TL and annual expenses of 20000 TL. It is expected to have a scrap value of 95000 TL at the end of its 7-year life. Find out how sensitive the investment decision of this investment alternative is to its revenues. (MARR: %10) Select one: a. 0.32294 b. 0.48225 c. 0.05634 d. 0.27838 e. 0.082902 f. 0.1719 g. 0.52003 h. 0.37235
Awal Co. has a proposed project that will generate sales of 1419units annually at a selling price of $23 each. The fixed costs are $13060 and the variable costs per unit are $4.40. The project requires $29269 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 9-year life of the project. The salvage value of the fixed assets is $8,100 and the tax rate is 33 percent. What is the operating cash flow
Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a new equipment. Each project will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of the projects are provided below. Project 1Cost $175,000 Project 2 Cost $185,000 Future Cash Flows For Project 1 Year 1 Year 2 Year 3 Year 4 Year 5 is 76,000 83,000 67,000 65,000 55,000 respectively. For Project 2 it is 87,000 78,000 69,000 65,000 57,000 for Year 1 Year 2 Year 3 Year 4 Year 5 resp. Required: a) Identify which project should the company accept based on NPV method. (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) b) Identify which project should the company accept based on simple pay back method if the payback criteria is maximum 2 years. c) Which project Giant Machinery should choose if two methods are in conflict
Build Limited plans to start a project (Project X) for the forthcoming year that will be sold to an international corporation. Build Limited is yet to pay for the research costs to date, which total Rs. 150,000. The following additional costs have been estimated by the managing director to complete project X. MachineryProject X will require a specialised machinery which cost Rs. 18,000 three years ago. It has a current disposal value of Rs. 8,000 and if used in project X, it is estimated that the disposal value in one year’s time will be Rs. 6,000. LabourProject X will require skilled labour which is hard to recruit in the present situation. Workers will have to be transferred from another project (project O) which is currently in operation. Project O is expected to generate sales of Rs. 150,000 in the next year. The prime cost of these sales is expected to be Rs. 100,000, including Rs. 40,000 for the labour cost itself. The overhead absorbed into this production (project O) is…

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