Alshamsi Ltd is a manufacturer of machine equipment product. The senior management has proposed to invest in a newmanufacturing plant that would aid in revolutionizing the machine equipment manufacturing process, and also thecompany’s products. A consultant has been engaged by the company, and has provided the following information: New equipment if purchased will cost $25,112,0 Old equipment–currently planned to be sold for $2,500,000 in four years – could be sold immediately for asalvage value of $5,250,00 If the new equipment is purchased, then this will increase the level of inventory immediately by $3,500,000, accounts receivable will increase by $1,444,500 and accounts payable increase by $3,500,000. The new equipment is estimated to have a useful life of four years and will depreciated using straight-linedepreciati At the end of four years, it is estimated that the salvage value on the new equipment will be$5,850,000. The cost of capital of the company is estimated to be 10% by the consultant. It is estimated that the purchase of the new equipment will result in an increase of sales revenue by $13,000,000 per year and an increase of variable costs by $6,800,000 per year. Ignore taxation Required: Prepare a statement of the incremental cash flows arising from the project. Assess the acceptability of the project based on the Net Present Value.
Alshamsi Ltd is a manufacturer of machine equipment product. The senior management has proposed to invest in a newmanufacturing plant that would aid in revolutionizing the machine equipment manufacturing process, and also thecompany’s products. A consultant has been engaged by the company, and has provided the following information: New equipment if purchased will cost $25,112,0 Old equipment–currently planned to be sold for $2,500,000 in four years – could be sold immediately for asalvage value of $5,250,00 If the new equipment is purchased, then this will increase the level of inventory immediately by $3,500,000, accounts receivable will increase by $1,444,500 and accounts payable increase by $3,500,000. The new equipment is estimated to have a useful life of four years and will depreciated using straight-linedepreciati At the end of four years, it is estimated that the salvage value on the new equipment will be$5,850,000. The cost of capital of the company is estimated to be 10% by the consultant. It is estimated that the purchase of the new equipment will result in an increase of sales revenue by $13,000,000 per year and an increase of variable costs by $6,800,000 per year. Ignore taxation Required: Prepare a statement of the incremental cash flows arising from the project. Assess the acceptability of the project based on the Net Present Value.
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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Question
Alshamsi Ltd is a manufacturer of machine equipment product. The senior management has proposed to invest in a newmanufacturing plant that would aid in revolutionizing the machine equipment manufacturing process, and also thecompany’s products.
A consultant has been engaged by the company, and has provided the following information:
- New equipment if purchased will cost $25,112,0
- Old equipment–currently planned to be sold for $2,500,000 in four years – could be sold immediately for asalvage value of $5,250,00
- If the new equipment is purchased, then this will increase the level of inventory immediately by $3,500,000, accounts receivable will increase by $1,444,500 and accounts payable increase by $3,500,000.
- The new equipment is estimated to have a useful life of four years and will
depreciated using straight-linedepreciati At the end of four years, it is estimated that the salvage value on the new equipment will be$5,850,000.
- The cost of capital of the company is estimated to be 10% by the consultant.
- It is estimated that the purchase of the new equipment will result in an increase of sales revenue by $13,000,000 per year and an increase of variable costs by $6,800,000 per year.
Ignore
Required:
- Prepare a statement of the incremental cash flows arising from the project.
- Assess the acceptability of the project based on the
Net Present Value .
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