The accountant has informed you that the fixed costs include depreciation of 20,000 a year on the
Question:
The accountant has informed you that the fixed costs include depreciation of £20,000 a year on the new equipment. They also include an allocation of £10,000 for fixed overheads.
A separate study has indicated that if the new equipment were bought, additional overheads, excluding depreciation, arising from producing the chemical would be £8,000 a year. Production would require additional working capital of £30,000.
For the purposes of your initial calculations ignore taxation.
Required:
(a) Deduce the relevant annual cash flows associated with buying the equipment.
(b) Deduce the payback period.
(c) Calculate the net present value using a discount rate of 8 per cent.
(Hint: You should deal with the investment in working capital by treating it as a cash outflow at the start of the project and an inflow at the end.)
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