James invests Rs 200,000 in a Turbo Engine that will increase production of Holé Tubes. The Engine will be depreciated on a straight-line basis for four years such that salvage value will be equal to 0 on year 4. It is expected that sales will be equal to Rs 90,000 in year 1 and it is expected that it will increase by 15% up to year 4. There is only a fixed cost of 34,000 payable every year and change in net working capital is equivalent to 142. (a) Calculate the incremental cash flows for year 0 to 4 if the company is subject to a corporate tax rate of 15%. (b) Calculate the Net Present Value using the incremental cash flows calculated in (a) and advise whether James Bombs should invest in the new machine if the interest rate is 12%.

James invests Rs 200,000 in a Turbo Engine that will increase production of Holé Tubes. The Engine will be depreciated on a straight-line basis for four years such that salvage value will be equal to 0 on year 4. It is expected that sales will be equal to Rs 90,000 in year 1 and it is expected that it will increase by 15% up to year 4. There is only a fixed cost of 34,000 payable every year and change in net working capital is equivalent to 142. (a) Calculate the incremental cash flows for year 0 to 4 if the company is subject to a corporate tax rate of 15%. (b) Calculate the Net Present Value using the incremental cash flows calculated in (a) and advise whether James Bombs should invest in the new machine if the interest rate is 12%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

The NUBD Co. is planning to purchase a new machine. The payback period will be 6 years. The cash flow from operations, net of income taxes, will be P25,000 a year for each of the first three years of the payback period and P35,000 a year for each of the last three years of the payback period. Depreciation of P15,000 a year will be charged to income for each of the six years of the payback period. How much will the machine cost?
The Janna Company is planning to purchase a new machine. The payback period will be six years. The cash flow from operation , net of income taxes, will be P20,000 a year for each of the first three years of the payback period and P30,000 a year for each of the last three years of the payback period. Depreciation of P15,000 a year will be charged to income for each of the six years of the payback period. How much will the machine cost?
ABC is starting a new project. It will require new equipment costing 34. The project is expected to increase gross profits by 26 per year, starting at the end of the first year, with associated costs of 13 for each of those years. The machine is expected to have a working life of 7 years and will be depreciated over those 7 years. The marginal tax rate is 0.3. What are the incremental free cash flows associated with the new machine in year 2?
Paul Restaurant is considering the purchase of a RM9,300 soufflé maker. The soufflé makerhas an economic life of five years and will be fully depreciated by the straight-line method.The machine will produce 1,400 soufflés per year, with each costing RM1.97 to make andpriced at RM4.95. The discount rate is 14 percent and the tax rate is 21 percent. Calculate theNPV of the project?
The NUBD Co. is planning to purchase a new machine for P300,000. The payback period is expected to be five years. The new machine is expected to produce cash flow from operations, net of income taxes, of P70,000 a year in each of the next three years and P50,000 in the fourth year. Depreciation of P50,000 a year will be charged to income for each of the five years of the payback period. What is the amount of cash flow from operations, net of taxes, that the new machine is expected to produce in the last (fifth) year of the payback period?
jordan is considering purchasing an investment costing $42,000 that will save power costs of $14,000 a year for each of 6 years. The investment will be depreciated on a straight-line basis with $0 salvage value. The tax rate is 40%. What are the cash flows after taxes each year?
APJ, Inc. is planning to purchase a new machine that will take six years to recover the cost. The new machine is expected to produce cash flow from operations, net of income taxes, of P4,500 a year for the first three years of the payback period and P3,500 a year of the last three years of the payback period. Depreciation of P3,000 a year shall be charged to income of the six years of the payback period. How much shall the machine cost? * A. P12,000 B. P18,000 C. P24,000 D. P36,000
Master Machine Berhad is considering a four-year project to improve its production efficiency. Buying a new machine press for RM385,000 is estimated to result in RM145,000 in annual pre-tax cost savings. The press is depreciated using straight-line method of 5 years, and it will have a salvage value at the end of the project of RM45,000. The press also requires an initial investment in spare parts inventory of RM20,000, along with an additional RM3,100 in inventory for each succeeding year of the project. If the company’s tax rate is 22 percent and its discount rate is 9 percent, should the company buy and install the machine press?
Turrican Ltd is considering whether to purchase a new machine. It will cost $440,000 to purchase and $20,000 to install. It is expected to generate additional annual revenues of $90,000 per year for eight years, at which time it will have no further use or value. The machine will cost an additional $5,000 in electricity to run. The company's required rate of return is 7% (the present value of an annuity of eight years at 7% is 5.97). Ignore depreciation for this question. Ignore taxes for this question. Required: (a) What is the payback period? Show calculations. (b) What is the cash flow in year zero? (c) What is the annual cash flow for years 1 - 8? (d) What is the NPV of this investment? (e) Should the company accept this project? Why or why not?
Macoupin Mining Inc. must purchase a new coring machine that costs $60,000 and will last 15 years with a salvage value of $12,000. The annual operating expenses will be $9000 the first year, increasing by $200 each year thereafter. The annual income is $15,000 per year. If Macoupin’s MARR is 8%, determine the net future worth of the machine purchase.
Courses/88945/quizzes/289708/take Van Nuys Company Year Cash Flow Cost of Capital 12% %24 (7,370) 24 1 4,000 (2,000) 24 24 4,000 (2,000) 24 4,000 24 (2,000) $4 4,000 24 (2,000) 5 $4 4,000 (2,000) 24 24 6. 4,000 24 (2,000)
Mr. Joseph Ramos, owner of a GYM is planning to buy an equipment worth P150,000 in his business Ramos Merchandizing. In the first year of operation, the project is expected to generate an income of P30, 000 on the second year, P29,000, on the third year P35,000, on the fourth year, P40,000 and on the fifth year P45,000. Compute the Payback Period, Net Present Value, Internal Rate of Return and submit your answer here. Hurdle rate set in this project is 14%.