The Perry Barr plc is a manufacturing company located in Birmingham. Recently, the Management of Perry Barr plc is considering an initial investment of £440,000 on some plant and machinery to manufacture a new product. The project also requires £200,000 on working capital. The expected sales and cost of the project are as follows: Year Sales Variable Costs Fixed Costs 1 £850,000 £500,000 £150,000 £980,000 £1,000,000 2 £600,000 £150,000 3 £610,000 £150,000 The plant and equipment will be depreciated on a straight-line basis over three years. The investment in working capital will be recovered at the end of Year 3, and the equipment would be sold for only £20,000. Additional Information: Perry Barr plc pays corporation tax at an effective rate of 20% at the end of each year. The company does not expect this to change over the life of the project. • The company's after-tax cost of capital is 12 per cent per annum.
The Perry Barr plc is a manufacturing company located in Birmingham. Recently, the Management of Perry Barr plc is considering an initial investment of £440,000 on some plant and machinery to manufacture a new product. The project also requires £200,000 on working capital. The expected sales and cost of the project are as follows: Year Sales Variable Costs Fixed Costs 1 £850,000 £500,000 £150,000 £980,000 £1,000,000 2 £600,000 £150,000 3 £610,000 £150,000 The plant and equipment will be depreciated on a straight-line basis over three years. The investment in working capital will be recovered at the end of Year 3, and the equipment would be sold for only £20,000. Additional Information: Perry Barr plc pays corporation tax at an effective rate of 20% at the end of each year. The company does not expect this to change over the life of the project. • The company's after-tax cost of capital is 12 per cent per annum.
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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(a) Derive the annual net cash-flows of the project.
(b) Calculate the net present value of the project and state the decision rule
for this investment appraisal.
Transcribed Image Text:The Perry Barr plc is a manufacturing company located in Birmingham. Recently,
the Management of Perry Barr plc is considering an initial investment of
£440,000 on some plant and machinery to manufacture a new product. The
project also requires £200,000 on working capital. The expected sales and cost
of the project are as follows:
Year
Sales
Variable Costs Fixed Costs
1
£850,000
£500,000
£150,000
2
£980,000
£600,000
£150,000
3
£1,000,000
£610,000
£150,000
The plant and equipment will be depreciated on a straight-line basis over three
years. The investment in working capital will be recovered at the end of Year 3,
and the equipment would be sold for only £20,000.
Additional Information:
Perry Barr plc pays corporation tax at an effective rate of 20% at the end
of each year. The company does not expect this to change over the life of
the project.
The company's after-tax cost of capital is 12 per cent per annum.
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