Homework Help is Here – Start Your Trial Now!
Business
Finance
Delta plans to buy a new machine. The cost of the machine, payable immediately, is P800,000 and the machine has an expected life of five years. Additional investment in working capital of P90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for P16 per unit and will incur variable costs of P11 per unit. Incremental fixed costs arising from the operation of the machine will be P160,000 per year. Delta has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Capital allowances and inflation should be ignored. Required: (a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (8) (b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable. (7) (c) (i) Explain briefly the meaning of the term 'sensitivity analysis' in the context of investment appraisal; (5) (ii) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a change in discount rate, and comment on your findings. (5)

Delta plans to buy a new machine. The cost of the machine, payable immediately, is P800,000 and the machine has an expected life of five years. Additional investment in working capital of P90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for P16 per unit and will incur variable costs of P11 per unit. Incremental fixed costs arising from the operation of the machine will be P160,000 per year. Delta has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Capital allowances and inflation should be ignored. Required: (a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (8) (b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable. (7) (c) (i) Explain briefly the meaning of the term 'sensitivity analysis' in the context of investment appraisal; (5) (ii) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a change in discount rate, and comment on your findings. (5)

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter12: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...
See similar textbooks
icon
Related questions
Question
Delta plans to buy a new machine. The cost of the machine, payable immediately, is P800,000 and the machine has an expected life of five years. Additional investment in working capital of P90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for P16 per unit and will incur variable costs of P11 per unit. Incremental fixed costs arising from the operation of the machine will be P160,000 per year. Delta has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Capital allowances and inflation should be ignored. Required: (a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (8) (b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable. (7) (c) (i) Explain briefly the meaning of the term 'sensitivity analysis' in the context of investment appraisal; (5) (ii) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a change in discount rate, and comment on your findings. (5)
Transcribed Image Text:Delta plans to buy a new machine. The cost of the machine, payable immediately, is P800,000 and the machine has an expected life of five years. Additional investment in working capital of P90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for P16 per unit and will incur variable costs of P11 per unit. Incremental fixed costs arising from the operation of the machine will be P160,000 per year. Delta has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Capital allowances and inflation should be ignored. Required: (a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (8) (b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable. (7) (c) (i) Explain briefly the meaning of the term 'sensitivity analysis' in the context of investment appraisal; (5) (ii) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a change in discount rate, and comment on your findings. (5)
AI-Generated Solution
AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.
steps

Unlock instant AI solutions

Tap the button
to generate a solution

SEE SOLUTION
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Fundamentals Of Financial Management, Concise Edi…
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Excel Applications for Accounting Principles
Excel Applications for Accounting Principles
Accounting
ISBN:
9781111581565
Author:
Gaylord N. Smith
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
SEE MORE TEXTBOOKS