Ant Ltd is a profitable manufacturing company. After evaluation of the budget for the coming financial year, you were asked as financial manager by the board of directors to consider the following project for possible expansion of the company’s activities. The details of the project are as follows: Cost price of Equipment: R500 000 Working capital required@ the beginning of the year R 60 000 Estimated economic life of equipment and project: 4 years Scrap value at end of life R 75 000 Annual income R650 000 Annual Variable costs R387 000 Annual fixed costs (Including depreciation) R163 000 Additional information Depreciation is calculated for accounting purposes on the Straight line method at 25 % per annum, on the cost price of the equipment. Management requires a 15 % after tax return on all capital investments. The income tax rate is at 40% and a wear and tear allowance, calculated on the straight line method, is 25% per annum and Ignore Vat. Assume that all cash flows occur on the last day of the year concerned, except the initial outlays which occur at the beginning of year 1.The working capital will be recovered in year 4 P.V Factors @ 15% Year 1 0.8696 Year 2 0.7561 Year 3 0.6575 Year 4 0.5718 Required: Advise the Board of Directors on what to do by the use of NPV technique in capital budgeting decisions. Please include calculations of cash flow from operating activities. Thank you
Ant Ltd is a profitable manufacturing company. After evaluation of the budget for the
coming financial year, you were asked as
consider the following project for possible expansion of the company’s activities.
The details of the project are as follows:
Cost price of Equipment: R500 000
Working capital required@ the beginning of the year R 60 000
Estimated economic life of equipment and project: 4 years
Scrap value at end of life R 75 000
Annual income R650 000
Annual Variable costs R387 000
Annual fixed costs (Including
Additional information
Depreciation is calculated for accounting purposes on the Straight line method at 25 % per
annum, on the cost price of the equipment. Management requires a 15 % after tax
all capital investments.
calculated on the straight line method, is 25% per annum and Ignore Vat.
Assume that all cash flows occur on the last day of the year concerned, except the initial
outlays which occur at the beginning of year 1.The working capital will be recovered in year 4
P.V Factors @ 15%
Year 1 0.8696
Year 2 0.7561
Year 3 0.6575
Year 4 0.5718
Required:
Advise the Board of Directors on what to do by the use of NPV technique in capital
budgeting decisions. Please include calculations of cash flow from operating activities. Thank you
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