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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Question
- Goldstone
The management of goldstone are considering the purchase of new equipment which would allow the company to expand its operations for three years. Details are as follows:
- The equipment will cost £1.2 million and it is anticipated it will be sold for £620,000 three years later.
- The sales volume generated by the new machine would be at a steady 88,000 units per year; the selling price will be kept at £40 and variable costs are estimated at £25 per unit for all three years.
- Additional premises will be rented at a cost of £280,000 pa, payable on the first day of each year.
- Working capital equal to 10% of sales revenue will need to be in place at the start of each year.
- The equipment will qualify for capital allowances, which are at a rate of 18% on a reducing balance basis, with a balancing allowance or charge on disposal.
- The company pays tax at 20%, has a cost of capital of 10% and always works to the nearest £1,000.
By calculating the NPV of the project, advise the management on whether the potential investment appears beneficial.
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