Al_Tech plc is considering investing in a new company, New_tech plc. It has estimated that the newtech company will cost £440,000. Cash flows from increased sales will be £160,000 in the first year.These cash flows will increase by 5% every year. Al_Tech plc estimates that New_tech plc will lose allits technological advantages in five years from now and will lose all its value. Assume that the initial costis paid now, and all the revenues are received at the end of each year. The company requires a 12%p.a. return for such an investment.a) Calculate the NPV of the investment project.b) Calculate the profitability index and the discounted payback period.c) Should Al_Tech plc consider investing in New_tech plc? What can you say about the internal rate ofreturn to that project? Explain.d) Explain why it is theoretically correct to assume that accepting a project with a positive NPV shouldincrease the value of a company by the NPV of the project.

Here's a detailed explanation for better understanding. a) Calculate the NPV of the investment…

Answered: Al_Tech plc is considering investing in…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $318,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,710,000. The cost of the machine will decline by $105,000 per year until it reaches $1,185,000, where it will remain. If your required return is 13 percent, calculate the NPV today. (Do not round. intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 If your required return is 13 percent, calculate the NPV if you wait to purchase the machine until the indicated year. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) $ $ $ 318,000.00 $ $ $ 15,545.43 120,545.43 225,545 43 31,200,545 43…
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