You are appraising a four-year project with sales equal to £100,000 per year andoperating costs equal to £50,000 per year. It requires an initial investment inmachinery of £80,000, and an initial investment in working capital of £10,000. Noother investments are required during the life of the project. To operate theproject, your firm will use a field currently owned by the company. The companyis not planning to use this field for other projects, but can rent it out for four yearsfor £10,000 per year. The machinery is depreciated to zero using the straight-linemethod over four years. The corporate tax rate is 30%. Taxes are paid in the sameyear as when the profits are made. The risk free rate of return and the expectedreturn on the market portfolio are 5% and 10%, respectively. The company beta andproject beta are, respectively, 1.5 and 1. The cost of capital is 10%. All cash flowsoccur at year end, except the initial investment which takes place today.Calculate the free cash flows for each year of this project.What is the NPV of this project? What is the IRR for this project? Is itcorrect to use the IRR rule for project appraisal in this case? Why or whynot?1.2.The company's CEO just told you that a small part of the field would beused for parking his luxury car for the next four years. The rest of the fieldcan still be used for your project (generating the same sales and requiringthe same inputs as above), but the company is no longer able to rent outthe field. Does this information affect the free cash flows of the project?Explain.3.

1. Free Cash Flow for each year of this Project

Calculate the free cash flows for each year of this project. What is the NPV of this project? What is the IRR for this project? Is it correct to use the IRR rule for project appraisal in this case? Why or why not? 1. 2. The company's CEO just told you that a small part of the field would be used for parking his luxury car for the next four years. The rest of the field can still be used for your project (generating the same sales and requiring the same inputs as above), but the company is no longer able to rent out the field. Does this information affect the free cash flows of the project? Explain. 3.

Calculate the free cash flows for each year of this project. What is the NPV of this project? What is the IRR for this project? Is it correct to use the IRR rule for project appraisal in this case? Why or why not? 1. 2. The company's CEO just told you that a small part of the field would be used for parking his luxury car for the next four years. The rest of the field can still be used for your project (generating the same sales and requiring the same inputs as above), but the company is no longer able to rent out the field. Does this information affect the free cash flows of the project? Explain. 3.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 25P

See similar textbooks

Similar questions

Candlex Ltd Co is appraising an investment project which has an expected life of four years and which will not be repeated. The initial investment, payable at the start of the first year of operation, is K5 million. Scrap value of K500, 000 is expected to arise at the end of four years. There is some uncertainty about what price can be charged for the units produced by the investment project, as this is expected to depend on the future state of the economy. The following forecast of selling prices and their probabilities has been prepared: Future economic state Weak Medium Strong Probability of future economic state 35% 50% 15% Selling price in current price terms K25 per unit K30 per unit K35 per unit These selling prices are expected to be subject to annual inflation of 4% per year, regardless of which economic state prevails in the future. Forecast sales and production volumes, and total nominal variable costs, have already been forecast, as follows: Year…
Candlex Ltd Co is appraising an investment project which has an expected life of four years and which will not be repeated. The initial investment, payable at the start of the first year of operation, is K5 million. Scrap value of K500, 000 is expected to arise at the end of four years. There is some uncertainty about what price can be charged for the units produced by the investment project, as this is expected to depend on the future state of the economy. The following forecast of selling prices and their probabilities has been prepared: Future economic state Weak Medium Strong Probability of future economic state 35% 50% 15% Selling price in current price terms K25 per unit K30 per unit K35 per unit These selling prices are expected to be subject to annual inflation of 4% per year, regardless of which economic state prevails in the future. Forecast sales and production volumes, and total nominal variable costs, have already been forecast, as follows: Year…
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. Required:a) Identify which project should the company accept based on NPV method. 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.
Clyn Contractors is preparing to replace critical earthmoving plant 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 Clyn 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. 1- Calculate the cost of finance to purchase the digger for £85,000 using the loan from industrial development fund 2- Explain how the financial health of Clyn 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 3-Calculate the amount of money Clyn Contractors should reserve (sinking fund) per year for it to make an outright purchase, as proposed by the accountant
. A company is considering a project that will require a cost outlay of $15 000 per year for four years. At the end of the project the salvage value will be $10 000. The project will yield returns of $60 000 in Year 4 and $20000 in Year 5. There are no returns after Year 5. Alternative investments are available that will yield a return of 16%. Should the company undertake the project?
A company is considering purchasing an equipment for $136,840. Shipping and installation costs would cost another $6,599. The project would require an initial investment in net working capital of $21,243 which would be recouped at the end of the project. What is the project's initial outlay? Do not enter $ or comma in the answer answer. Enter your final answer of initial outlay as an absolute number (that means, enter it as a positive number).
Riguel Company is considering a long-term capital investment project in laser equipment. This will require an investment of $280,000, and it will have a useful life of 5 years. Annual net income is expected to be $16,000 a year. Depreciation is computed by the straight-line method with no salvage value. The company's cost of capital is 10%, and it desires a cash payback of 60% of a project's useful life or less. (Hint: Assume cash flows can be computed by adding back depreciation expense.) (Round all computations to two decimal places unless directed otherwise.) a. Compute the cash payback period for the project. b. Compute the net present value for the project. (Round to nearest dollar.) c. Compute the annual rate of return for the project. d. Should the project be accepted? Why or why not?
Vaughn Company is considering a long-term investment project called ZIP. ZIP will require an investment of $122,200. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,700, and annual cash outflows would increase by $39,000. The company's required rate of return is 12%. Click here to view PV table. Calculate the net present value on this project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value Whether this project should be accepted? The project should be
OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $6.0 million, has a 20-year life, and will have zero salvage value. If the system is implemented, the company will save $820,000 per year in direct labor costs. The company requires a 12% return from its investments.1. Compute the proposed investment’s net present value.2. Using your answer from part 1, is the investment’s internal rate of return higher or lower than 12%?
A firm has only $10,000 to invest and must choose between two projects. Project A returns $12,400 after a year while project B pays $15,609 after three years. If management wants to select the investment with the higher return, which alternative should be chosen? Calculate the return for each investment and indicate which option provides the higher return and explain why.
Melan Co. is considering a new gin distillery investment in Surrey for fiveyears. The company has spent £0.2 million on a feasibility study during thelast two months. The study reports that the company will be required topurchase a site in Surrey for £2.6 million. It is estimated that the site can besold for £2.7 million at the end of the project. The study also reports that thecompany will be required to purchase new machinery and equipment for £5.5million in order to operate the distillery and that these assets can be sold for£2.5 million at the end of the project.The following projected figures for each year of the life of the project hasbeen prepared:Year1 2 3 4 5£m £m £m £m £mSales revenue 6.2 6.6 6.9 6.1 6.7Costs 2.1 2.2 2.4 2.3 2.2 The following additional information is also available:• The investment project will require an investment of £0.8 million ofworking capital at the beginning of the project. This amount will bereleased at the end of the investment period.• The…
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 125,000 units per year Unit price: $240 Variable cost: $144 Fixed cost: $5,430,000 The project will last for 10 years and requires an initial Investment of $21.78 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12% However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $230. The good news is that fixed costs could be as low as $3,620,000, and variable costs would decline in proportion to sales. a. What is project NPV If all variables are as expected? Note: Do not round Intermediate calculations. Enter your answer in thousands not in…