a) A company plans to purchase a new machine due to the expected demand for a new product. The machine costs Ghc185,000 and it is expected that the machine shall be used for five (5) years with a scrap value of Ghc15,000. The company expects the demand for the product to be as follows: Year Demand (Units) 2 25,000 30,000 3 35,000 4 40,000 5 20,000 % Increase Selling Price Variable Cost of production Fixed production expenses 2% per year 3% per year 5% per year The company's cost of capital is 10% and pays corporate tax at a rate of 25% in the related year. Calculate the Net Present Value (NPV) of purchasing the new machine advice whether it makes economic sense to buy the new machine. (8 Marks) Question 4b Suppose that the money market of Truthland has the following money supply and demand equations: Money Supply: M = 16000 Money Demand: M=20,000 - 80,000r Where money is in billions of Ghana Cedis and interest rates, r, is written as a decimal. i. Make a sketch of the money supply and demand curves ii. Calculate the equilibrium interest rate and amount of money. iii. Explain why the interest and prices of bonds are negatively related. Suppose the interest rate in the money market in Truthland is currently at 10%. What is the amount of excess supply of or excess demand for money? What will happen in the market? if the interest rate is fixed at 10% what will happen in the money market? iv. a) A company plans to purchase a new machine due to the expected demand for a new product. The machine costs Ghc185,000 and it is expected that the machine shall be used for five (5) years with a scrap value of Ghc15,000. The company expects the demand for the product to be as follows: Year Demand (Units) 2 25,000 30,000 3 35,000 4 40,000 5 20,000 % Increase Selling Price Variable Cost of production Fixed production expenses 2% per year 3% per year 5% per year The company's cost of capital is 10% and pays corporate tax at a rate of 25% in the related year. Calculate the Net Present Value (NPV) of purchasing the new machine advice whether it makes economic sense to buy the new machine. (8 Marks) Question 4b Suppose that the money market of Truthland has the following money supply and demand equations: Money Supply: M = 16000 Money Demand: M=20,000 - 80,000r Where money is in billions of Ghana Cedis and interest rates, r, is written as a decimal. i. Make a sketch of the money supply and demand curves ii. Calculate the equilibrium interest rate and amount of money. iii. Explain why the interest and prices of bonds are negatively related. Suppose the interest rate in the money market in Truthland is currently at 10%. What is the amount of excess supply of or excess demand for money? What will happen in the market? if the interest rate is fixed at 10% what will happen in the money market? iv
