The directors of Galle Traders are now considering replacing its production equipment with new equipment that will be fully operational from January 1, 2021. The new equipment: Has a cost of Rs. 12 million. Increases the fixed production cost (excluding depreciation) by 10% per annum and the fixed production cost for the current year is Rs 4 million. Reduces the variable production cost per unit by 20% and the current variable cost per unit is Rs 100. Has a life of five years, a residual value after five years of Rs. 2 million and is to be depreciated using straight line method. Other information: Unit selling price is Rs. 200 and the demand for the product is 50,000 units for the first year which will increase by 10,000 units for each year thereafter. Cost of capital for this type of investment is 10% per annum. Calculate the Net Present Value of the Project assuming the cost of capital is 10% Year 0 1 2 3 4 5 DCF 1 0.909 0.826 0.751 0.683 0.621 Evaluate, based on Net Present Value, whether Galle Traders should purchase new equipment. Ignore taxation and inflation? And Calculate Accounting Rate of Return?
The directors of Galle Traders are now considering replacing its production equipment with new equipment that will be fully operational from January 1, 2021. The new equipment: Has a cost of Rs. 12 million. Increases the fixed production cost (excluding depreciation) by 10% per annum and the fixed production cost for the current year is Rs 4 million. Reduces the variable production cost per unit by 20% and the current variable cost per unit is Rs 100. Has a life of five years, a residual value after five years of Rs. 2 million and is to be depreciated using straight line method. Other information: Unit selling price is Rs. 200 and the demand for the product is 50,000 units for the first year which will increase by 10,000 units for each year thereafter. Cost of capital for this type of investment is 10% per annum. Calculate the Net Present Value of the Project assuming the cost of capital is 10% Year 0 1 2 3 4 5 DCF 1 0.909 0.826 0.751 0.683 0.621 Evaluate, based on Net Present Value, whether Galle Traders should purchase new equipment. Ignore taxation and inflation? And Calculate Accounting Rate of Return?
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
The directors of Galle Traders are now considering replacing its production equipment with
new equipment that will be fully operational from January 1, 2021.
The new equipment:
- Has a cost of Rs. 12 million.
- Increases the fixed production cost (excluding depreciation) by 10% per annum and the
fixed production cost for the current year is Rs 4 million.
- Reduces the variable production cost per unit by 20% and the current variable cost per unit
is Rs 100.
- Has a life of five years, a residual value after five years of Rs. 2 million and is to be
depreciated using straight line method.
Other information:
- Unit selling price is Rs. 200 and the demand for the product is 50,000 units for the first year
which will increase by 10,000 units for each year thereafter.
- Cost of capital for this type of investment is 10% per annum.
Calculate the
Year 0 1 2 3 4 5
DCF 1 0.909 0.826 0.751 0.683 0.621
Evaluate, based on Net Present Value, whether Galle Traders should purchase new equipment. Ignore
And Calculate Accounting
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