Following a feasibility conducted for $300,000 last year, Witz Black Ltd is considering investing in a new plant costing $4 million. The plant will occupy unused premises with a market value of 1 million that are already owned by the company. The company headquarters’ overheads are currently $2.5 million per year; these are allocated annually as expenses to new project on the basis of 3% of the plant cost. The plant is expected to generate sales of $2.8 million per year for its estimated useful life of five years.The required rate of return is24%. Cost of sales is 40% of sales . A straight-line method of depreciation will be applied, and the plant will have a written-down value of $1 million. The company evaluates projects on after-tax cash flows, and the relevant tax rate is 20%. At the end of the project's life, the plant is expected to have resale value of $I.5miIlion. REQUIRED a, List the relevant cash flows for the project. B calculate the net present value (NPV). c. Advise whether the project should be accepted. Explain why.
Following a feasibility conducted for $300,000 last year, Witz Black Ltd is considering investing in a new plant costing $4 million. The plant will occupy unused premises with a market value of 1 million that are already owned by the company. The company headquarters’ overheads are currently $2.5 million per year; these are allocated annually as expenses to new project on the basis of 3% of the plant cost. The plant is expected to generate sales of $2.8 million per year for its estimated useful life of five years.The required rate of return is24%. Cost of sales is 40% of sales . A straight-line method of depreciation will be applied, and the plant will have a written-down value of $1 million. The company evaluates projects on after-tax cash flows, and the relevant tax rate is 20%. At the end of the project's life, the plant is expected to have resale value of $I.5miIlion. REQUIRED a, List the relevant cash flows for the project. B calculate the net present value (NPV). c. Advise whether the project should be accepted. Explain why.
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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Following a feasibility conducted for $300,000 last year, Witz Black Ltd is considering investing in a new plant costing $4 million. The plant will occupy unused premises with a market value of 1 million that are already owned by the company. The company headquarters’ overheads are currently $2.5 million per year; these are allocated annually as expenses to new project on the basis of 3% of the plant cost. The plant is expected to generate sales of $2.8 million per year for its estimated useful life of five years.The required rate of return is24%. Cost of sales is 40% of sales . A straight-line method of depreciation will be applied, and the plant will have a written-down value of $1 million. The company evaluates projects on after-tax cash flows, and the relevant tax rate is 20%. At the end of the project's life, the plant is expected to have resale value of $I.5miIlion.
REQUIRED
a, List the relevant cash flows for the project.
B calculate the net present value (NPV).
c. Advise whether the project should be accepted. Explain why.
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