(a) Calculate the net present value of the planned purchase of the machine using a nominal (money term) approach and comments on its financial acceptability.
PCW Co is a listed company that operates in the automobile industry. Due to an increase in local demand for the company’s products, PCW Co decides to invest in a new machinery. Such an investment project requires some initial investment in working capital of $300,000. And the investment in working capital is subject to general inflation, which is
Annual sector-specific inflation
Variable costs. $100 / unit 6.0 %
Incremental fixed costs $200,000 / year. 4.5 %
Selling price $400 / unit 4.0 %
Capital allowance on plant and machinery is on a 25% reducing-balance basis, with the remaining allowance to be claimed in full during the final year of the investment project. The current corporate tax rate is 35%. The company has a nominal (money-terms) after-tax cost of capital of 10%.
(a) Calculate the
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