The 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 the costs of production are expected to be Rs 31.10 per unit. There is also a fixed cost which are 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 1 11 2 0.826 3 0.751 4 Discount Rate -10% 0.909 (a) Calculate the net cash flow for each year. (b) Calculate the annual profit. 0.683 (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.
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- A manufacturer is considering investing in a new production line that requires an initial capital investment of £79,000. Once in operation, the production line is expected to generate the following net earnings at the end of the years stated: YEAR 1 2 3 4 EARNINGS £15,500 £17,200 £19,500 £12,700 Furthermore, exactly mid-year during the second year there will be a further one-off maintenance cost amounting to £1,600. Then at the end of the planned 4-year service it is expected that the company will be able to sell the machinery for £41,000. Calculate, to the nearest 0.01%, the annual internal rate of return the manufacturer can expect to earn from this investment.Maria Corporation Limited(MCL) is interested to invest in a project. The initial cost of the project is Rs. 11.5 million with the salvage value of Rs. 2 million. The project will generate generates revenue of Rs 15 million per year with variable cost of Rs. 6 million and other expenses of Rs. 4 million. The revenue and cost/expense will expected to increase by 5% per annum for first 3 years and 7.5% for last 2 years. MCL’s cost of capital is 12%. The depreciation of the project is to be calculated at 33.33%, 44.45%, 14.81% and 7.41% respectively. The working capital changes as to percentage of revenue is 25%. The tax rate for the MCL is 35% per annum. Required: Calculate the operating cash-flows of the project till year 5. Evaluate the project via all capital budgeting techniques.XYZ Company is looking to invest in some new machinery to replace its current malfunctioning one. The new machine, which costs P420,000, would increase annual revenue by P200,000 and annual cash expenses by P50,000. The machine is estimated to have a useful life of 12 years and P30,000 salvage value. A. Accounting rate of return on initial investment B. Accounting rate of return on average investment.
- The directors of Galle Traders are now considering replacing its production equipment with new equipment that will be fully operational from January 1, 2021. The new equipment: Has a cost of Rs. 12 million. Increases the fixed production cost (excluding depreciation) by 10% per annum and the fixed production cost for the current year is Rs 4 million. Reduces the variable production cost per unit by 20% and the current variable cost per unit is Rs 100. Has a life of five years, a residual value after five years of Rs. 2 million and is to be depreciated using straight line method. Other information: Unit selling price is Rs. 200 and the demand for the product is 50,000 units for the first year which will increase by 10,000 units for each year thereafter. Cost of capital for this type of investment is 10% per annum. Calculate the Net Present Value of the Project assuming the cost of capital is 10% Year 0 1 2 3…Use the information provided below to calculate the Accounting Rate of Return on averageinvestment (expressed to two decimal places). INFORMATIONThe management of Unicorn Limited is presently appraising the production and sale of a new product. Thiswould involve the purchase of a new machine with a cost price of R500 000. The machine is expected to havea useful life of six years and a scrap value of R100 000.Annual sales of the product are estimated to be 3 000 units at a selling price of R120 per unit. Expenses(including depreciation) are expected to amount to R80 per unitXYZ Company is looking to invest in some new machinery to replace its current malfunctioning one. The new machine, which costs P420,000, would increase annual revenue by P200,000 and annual cash expenses by P50,000. The machine is estimated to have a useful life of 12 years and P30,000 salvage value. A. Payback period in years B. Payback period reciprocal C. Accounting rate of return on average investment.
- Raisons Reels Pty Ltd is considering investing in the purchase of new equipment The equipment will cost $350 000 There will be net cash inflows in each of the three years of: Year 1: $140 000, Year 2: $160 000 and Year 3: $122 000 The equipment is thought to have a residual value of $60 000 at the end of year 3 The required rate of return (RRR) is 14% 4.The Accounting Rate of Return (ARR) for this investment is: 5. Which of the following statements is true regarding the decision rule for ARR? 6. A qualitative feature of investments is:Carbon plc is planning to buy a new machine with an expected life of five years. The machine would cost £900,000 and will generate cash flows in the subsequent years, as shown below. Year 1 2 3 4 5 Cash flow(£) 50,000 350,000 120,000 80,000 800,000 After the end of the fifth year, business activity from this machine will cease and no more cash flows will be generated. The initial cost of £900,000 in the machine is to be depreciated over the five-year using the straight-line method. The machine will have no scrap value at the end of five years. The management judges that the cash inflows shown above are also an accurate estimation of the profit before depreciation for each of the years. The board of directors is used to evaluating project proposals on the basis of a payback rule and requires investments to achieve payback in three years. The Accounting Rate of Return is…The Candida Company wants to purchase a new machine for its factory operations at a cost of $475,000. The investment is expected to generate $175,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $25,000. The machine is expected to have zero value at the end of the four-year period. Required: What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered. a. $509,775; yes b. $34,775; no c. $59,775; yes d. $163,375; no
- A company will invest in a machine worth 50000$ to produce a new product. The economic life of the machine is 4 years and its scrap value is 1000$. It will be produced on this machine The annual sales revenue of the product is expected to be 25000 $. Annual operation of the machine Expenditure is expected to be 10000 $. a-) The income tax is 40% and the investment will be made with the company’s equity. Assuming, find the net cash flows that will be generated by purchasing the machine.Raguna Co. is considering adding a new machine to its production line. Themachine costs RM3,000,000 with additional installation cost of RM150,000. The economic life of the machine is 6 years and Raguna Co. estimated that it can be sold for RM240,000 at the end of its economic life. The purchase will incur increases in cash by RM50,000, inventory by RM60,000, and accounts payable by RM30,000. The additional production from operating the new machine will increase sales revenues by RM900,000 and increase operation costs by RM300,000 per annum. In addition, the use of the machine will help the company in reducing labor costs by RM100,000 per year. The book value of the machine will depreciate following the simple straight-line basis. The company’s marginal tax rate is 30% and it requires 10% return. Calculate the annual operating cash flows for year 1 to 6.B) Pakar & Son Sdn Bhd is looking to invest in a new project, with a project life of 4 years. The project involves a new manufacturing equipment that makes inline skate wheels. The marketing department estimates a total sale of 6,000 units each year at a price of RM300 per unit. Variable cost is about 40% from the selling price. Fixed cost is estimated at RM450,000 per year. The new equipment will cost RM1,500,000. The machine will be depreciated to zero over its 6-year economic life using the straight-line method. At the end of year 4, the equipment can be sold at RM650,000. The project also requires an investment of RM525,000 in net working capital at the start and it will be recovered in full at the end of the project's life. The corporate tax rate is 35 percent. The required rate of return for the project is 25%. i) What is the initial cost of this project? ii) Determine the annual cash flow of this project from year 1 to year 4.