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
Related questions
Question
![1. Futura Limited is considering a capital project about which the following
information is available.
I The investment outlay on the project will be 200 million. This consists of 7150
million on the plant and machinery and 750 million on net working capital. The
entire outlay will be incurred in the beginning.
The life of the project is expected to be 7 years. At the end of 7 years, fixed
assets will fetch a net salvage value of 748 million whereas net working capital
will be liquidated at its book value.
| The project is expected to increase the revenues of the firm by 7250 million per
year. The increase in costs on account of the project is expected to be 100
million per year (This includes all items of cost other than depreciation,
interest, and tax). The tax rate is 30 percent.
| Plant and machinery will be depreciated at the rate of 25 percent per year as per
the written down method.
(a) Estimate the post-tax cash flows of the project.
(b) Calculate the IRR of the project.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd321c056-cd50-4b61-ab62-b8b536b1ec55%2Fd8f3f1ef-db41-4e89-8d67-5308bc9424d5%2F134b4n5_processed.png&w=3840&q=75)
Transcribed Image Text:1. Futura Limited is considering a capital project about which the following
information is available.
I The investment outlay on the project will be 200 million. This consists of 7150
million on the plant and machinery and 750 million on net working capital. The
entire outlay will be incurred in the beginning.
The life of the project is expected to be 7 years. At the end of 7 years, fixed
assets will fetch a net salvage value of 748 million whereas net working capital
will be liquidated at its book value.
| The project is expected to increase the revenues of the firm by 7250 million per
year. The increase in costs on account of the project is expected to be 100
million per year (This includes all items of cost other than depreciation,
interest, and tax). The tax rate is 30 percent.
| Plant and machinery will be depreciated at the rate of 25 percent per year as per
the written down method.
(a) Estimate the post-tax cash flows of the project.
(b) Calculate the IRR of the project.
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