QUESTION 4The directors of Raga Limited are considering a new business opportunity.This involves the purchase of machinery costing Rs 600,000.Units produced by the machine are expected to have a cash inflow of Rs 50 each and thecosts of production are expected to be Rs 31.10 per unit. There is also a fixed cost whichare expected to be Rs 120,000 per annum excluding depreciation.The machinery is expected to lose its value evenly over four years and then be scrapped.The directors expect to produce and sell 20,000 units each year.Raga Limited has a cost of capital of 10%.REQUIRED:Year(b) Calculate the annual profit.1234DiscountRate -10%0.909(a) Calculate the net cash flow for each year.0.8260.7510.683(c) Calculate the payback period for the machinery.(d) Using the answer in part (a) calculate the Net Present Value (NPV).(e) Using the answer in part (b) calculate ARR.(f) Based on the above advice Raga Limited if he should invest in the machinery usingvalid arguments.(g) Give one advantage and one disadvantage of the payback method.

The payback period refers to the period which is required to meet the initial investment with the…

Answered: The directors of Raga Limited are…

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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J.B. Enterprises is considering the purchase of new equipment with a cost of $1,000,000. If the equipment is purchased, the incremental net cash flows are expected to be $300,000 per year for five years. These net cash flows already reflect the of the equipment and the company’s 40% tax rate. However, there are liability risks associated with the use of this product. The board of directors estimates a “cost of worry” of $25,000 per year. Calculate the net present value of this project incorporating the cost of worry if the company’s cost of capital is 10%. a. $42,466 b. $340,909 c. $375,000 d. $61,420
B) Pakar & Son Sdn Bhd is looking to invest in a new project, with a project life of 4 years. The project involves a new manufacturing equipment that makes inline skate wheels. The marketing department estimates a total sale of 6,000 units each year at a price of RM300 per unit. Variable cost is about 40% from the selling price. Fixed cost is estimated at RM450,000 per year. The new equipment will cost RM1,500,000. The machine will be depreciated to zero over its 6-year economic life using the straight-line method. At the end of year 4, the equipment can be sold at RM650,000. The project also requires an investment of RM525,000 in net working capital at the start and it will be recovered in full at the end of the project's life. The corporate tax rate is 35 percent. The required rate of return for the project is 25%. i) What is the initial cost of this project? ii) Determine the annual cash flow of this project from year 1 to year 4.
The financial manager of Tepung Berhad, Encik Danial, is considering a project which requiresan investment of RM53,000 in a machine. This machine in which will improve the performanceand production quantities of the company’s range of biscuits. At the end of the five-year period,this machine will be scrapped.Encik Danial expects that this project will lead to increased sales for the next five years as follows:Year Sales (‘000 units)1 8002 9003 1,0004 1,1005 1,200The selling price per unit is RM20. Labor and utilities costs are estimated to be RM8 and RM4 perunit respectively. The project requires an increase in net working capital of RM10,000 in the initialyear and will be fully recovered at the end of the project. The company’s required return oninvestment of 15%.Encik Danial thinks that the unit sales, selling price, labor, and utilities cost projections areaccurate to within 15%.Note: The calculation on depreciation, fixed cost and the effect on tax is ignored for this question.…
1. Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.82 million. The marketing department predicts that sales related to the project will be $2.52 million per year for the next four years, after which the firm expects to sell it for $500,000. The machine is a five-year class asset and will be depreciated down to zero over five years under the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $200,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The required rate of return (or discount rate) for the project is 12.5 percent. Compute the NPV, IRR, and payback period of the project. The firm’s acceptable payback period is 3 years. Is this project acceptable to the firm?
Advise the directors whether or not the company should purchase the machine. Justify youranswer.
Dune Ltd is considering a project that will require the use of a crane that cost £600,000 when it was acquired four years ago and which has a current carrying amount (statement of financial position value) of £370,000. If the project is not undertaken, the crane could be sold for £180,000 or it could be used for another project. If it is used for the other project, the business will not have to purchase another crane for £250,000. The business uses the net present value (NPV) method to appraise investment projects. What is the relevant cost of the machine when calculating the NPV of the project? O a. £180,000 O b. £370,000 O c. £780,000 O d. £250,000 e. £600,000
A mine is for sale for $240,000. It is believed that the mine will produce a profit of $65,000 the first year, but the profit will decline by $5,000 a year after that, eventually reaching zero, whereupon the mine will be worthless. What rate of return would this $240,000 investment produce for the purchaser of the mine?
Pinson&. Co. are considering buying a mobile drilling rig to expand the range of services they provide for the water, gas and oil industries. The rig would cost GH 620.000 and last for four at the end of which it would be sold for GHc20.000. The estimated profits for each at the four years are shown below. The company uses the straight-line method of calculating depreciation. Its latest set of accounts showed its return on capital employed to be 11.1 %. Year Profit (loss) 1 (50,000) 2 50,000 3 150,000 4 50,000 Required: 1. Calculate the accounting rate of return (using the initial investment). 2. Calculate the payback period. 3. Calculate the net present value if Finson & Co. cost of capital is 10.0%.
Mo Salah, owner of Liverpool Limited, was approached by a local dealer in air conditioning units. The dealer proposed replacing the old cooling system of the company with a modern, more efficient system. The cost of the new system was quoted at R140 000, but it would save R30 000 per year in energy costa. The estimated life of the new system is 10 years, with no salvage value expected. All capital projects are required to earn at least the firms cost of capital at 10%. Required: Calculate the projects Internal Rate of Return (IRR).

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