You have been asked to evaluate a proposal for the Bamboo Traders Proprietary Limited. The Directors of the business, Mr. Timoci and Mr. Lulu have a marginal tax rate is 47%. They have given you the following information about the project: it has a 5 year lifetime the installed cost of the project will be $250 000 the tax office gives this type of asset an effective life of 4 years the asset will be sold at the end of the project for an estimated $20 000 sales of$90 000 are expected in the first year of the project sales will grow at a rate of 5% p.a. for each year of the project cost of goods sold (excluding depreciation) is expected to be 30% of sales the owners required return is 8% Required: A. Using NPV, advise the directors of Bamboo Traders Proprietary Limited on the acceptability of the project. Round your calculations for each cash inflow or outflow to the nearest whole dollar. B. Why are lost sales included in the calculation of after-tax cash flows? C. Provide two factors that can create ranking problems among mutually exclusive projects? Explain each factor and show how the associated ranking problem can be overcome. D. Give two non-discounted methods of project appraisal and list two benefits of using such approaches
You have been asked to evaluate a proposal for the Bamboo Traders Proprietary Limited. The
Directors of the business, Mr. Timoci and Mr. Lulu have a marginal tax rate is 47%. They have
given you the following information about the project:
it has a 5 year lifetime
the installed cost of the project will be $250 000
the tax office gives this type of asset an effective life of 4 years
the asset will be sold at the end of the project for an estimated $20 000
sales of$90 000 are expected in the first year of the project
sales will grow at a rate of 5% p.a. for each year of the project
cost of goods sold (excluding
the owners required return is 8%
Required:
A. Using NPV, advise the directors of Bamboo Traders Proprietary Limited on the
acceptability of the project. Round your calculations for each
nearest whole dollar.
B. Why are lost sales included in the calculation of after-tax cash flows?
C. Provide two factors that can create ranking problems among mutually exclusive projects?
Explain each factor and show how the associated ranking problem can be overcome.
D. Give two non-discounted methods of project appraisal and list two benefits of using such
approaches
Step by step
Solved in 3 steps
