DYC Co is a medium sized manufacturing company that plans to increase capacity by purchasing new machinery at an initial cost of $3 million. The new machine will also require a further investment in working capital of $400,000. The investment is expected to increase annual sales by 5,500 units. Investment in replacement machinery would be needed after five years. Financial data on the additional units to be sold is as follows: $ 500 200 Selling price per unit Production costs per unit Variable administration and distribution expenses are expected to increase by $220,000 per year as a result of the increase in capacity. Fixed Costs are expected to $250 000. The scrap value of the machinery after five years is expected to be negligible. Tax liabilities are paid in the year in which they arise and DYC Co pays tax at 30% of annual profits. The Finance Director of DYC Co has proposed that the $3.4 million investment should be financed by an issue of loan notes at a fixed rate of 8% per year. DYC Co uses an after tax discount rate of 12% to evaluate investment proposals. Straight line depreciation is to be used. Required: Calculate the Net Present value of the new machinery. I

DYC Co is a medium sized manufacturing company that plans to increase capacity by purchasing new machinery at an initial cost of $3 million. The new machine will also require a further investment in working capital of $400,000. The investment is expected to increase annual sales by 5,500 units. Investment in replacement machinery would be needed after five years. Financial data on the additional units to be sold is as follows: $ 500 200 Selling price per unit Production costs per unit Variable administration and distribution expenses are expected to increase by $220,000 per year as a result of the increase in capacity. Fixed Costs are expected to $250 000. The scrap value of the machinery after five years is expected to be negligible. Tax liabilities are paid in the year in which they arise and DYC Co pays tax at 30% of annual profits. The Finance Director of DYC Co has proposed that the $3.4 million investment should be financed by an issue of loan notes at a fixed rate of 8% per year. DYC Co uses an after tax discount rate of 12% to evaluate investment proposals. Straight line depreciation is to be used. Required: Calculate the Net Present value of the new machinery. I

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1jM

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