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The 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 the costs of production are expected to be Rs 31.10 per unit. There is also a fixed cost which are 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 1 11 2 0.826 3 0.751 4 Discount Rate -10% 0.909 (a) Calculate the net cash flow for each year. (b) Calculate the annual profit. 0.683 (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.

The 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 the costs of production are expected to be Rs 31.10 per unit. There is also a fixed cost which are 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 1 11 2 0.826 3 0.751 4 Discount Rate -10% 0.909 (a) Calculate the net cash flow for each year. (b) Calculate the annual profit. 0.683 (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.

Essentials Of Investments
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
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QUESTION 4 The 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 the costs of production are expected to be Rs 31.10 per unit. There is also a fixed cost which are 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. 1 2 3 4 Discount Rate -10% 0.909 (a) Calculate the net cash flow for each year. 0.826 0.751 0.683 (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 using valid arguments. (g) Give one advantage and one disadvantage of the payback method.
Transcribed Image Text:QUESTION 4 The 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 the costs of production are expected to be Rs 31.10 per unit. There is also a fixed cost which are 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. 1 2 3 4 Discount Rate -10% 0.909 (a) Calculate the net cash flow for each year. 0.826 0.751 0.683 (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 using valid arguments. (g) Give one advantage and one disadvantage of the payback method.
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