Gemstones Ltd. a medium sized processor of precious stones is in expansion mode. Business has been booming, and looks set to continue to do so for the foreseeable future. It needs a spectrometer to enable it to differentiate between natural and laboratory made gems. Gemstones Ltd has asked your company to assist in assessing the financial feasibility the investment. The spectrometer will cost $800,000, and an additional $100,000 will have to be spent to modify it for this special use. The company expects to sell the equipment in 3 years for $300,000. (For depreciation purposes it falls in the MACRS 3 class which allows full cost recovery in four years in the annual rate of 33%, 45%, 15%, and 7% respectively). Gemstones Ltd.'s tax rate is 40%. Operating the equipment will require working capital of $65,000. The new equipment is expected to increase revenues (before tax) by $75,000 per annum. The cost of capital is 10%. (1) What are the net operating cash flows in years 1, 2, and 3? (ii) What is the terminal value? (iii) In your opinion, should the equipment be purchased? 10 arks

Gemstones Ltd. a medium sized processor of precious stones is in expansion mode. Business has been booming, and looks set to continue to do so for the foreseeable future. It needs a spectrometer to enable it to differentiate between natural and laboratory made gems. Gemstones Ltd has asked your company to assist in assessing the financial feasibility the investment. The spectrometer will cost $800,000, and an additional $100,000 will have to be spent to modify it for this special use. The company expects to sell the equipment in 3 years for $300,000. (For depreciation purposes it falls in the MACRS 3 class which allows full cost recovery in four years in the annual rate of 33%, 45%, 15%, and 7% respectively). Gemstones Ltd.'s tax rate is 40%. Operating the equipment will require working capital of $65,000. The new equipment is expected to increase revenues (before tax) by $75,000 per annum. The cost of capital is 10%. (1) What are the net operating cash flows in years 1, 2, and 3? (ii) What is the terminal value? (iii) In your opinion, should the equipment be purchased? 10 arks

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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