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1. MNC Co is considering an investment that will involve expanding the current facilities so as to produce an extra 4,500 units per year to
1. MNC Co is considering an investment that will involve expanding the current facilities so as to produce an extra 4,500 units per year to meet increased demand for its products. The extra demand is associated with the improved transportation in SADC. The planned expansion will cost K140,000. The project will last for four years with 5% scrap value at the end of the period. Research and development cost incurred to-date is K55,000 while the cost of market rescarch currently not yet paid based on work done is K33,000 The project finance will not alter the existing capital structure despite financing the expansion using retained eanings and a 10% bank loan The selling price is K17 per unit and the variable costs of production are K2.90 per unit Both the selling price and the variable cost are in current price terms. Selling price inflation of 3% per year and variable cost inflation of 5% per year are expected. Incremental fixed cost and allocated fixed costs of production in nominal terms are forecast as follows Year 2 3 4 Incremental fixed cost (S) 11,000 14,000 16,000 16,000 Allocated fixed cost (S) 6,000 8,000 9,000 9,000 Working capital each year is expected to be equivalent to 10 % of the incremental fixed cost cach year. The company can claim capital allowances (tax allowable depreciation) at a 25% reducing balance basis. Corporation tax of 20% per year is payable one year in arrears. The nominal after tax cost of capital is 12%. Required a) Calculate the net present value of the project and comment on the results. b) Calculate the internal rate of return of the project and comment on the results e) Briefly explain why some figures (if any) are excluded from the evaluation in (a) above
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