Question
(a) corkscew Ltd is limited to spending 3,500,000 on capital investments this year. These investments are all independent and divisible. Investment Cost of Investment NPV
(a) corkscew Ltd is limited to spending 3,500,000 on capital investments this year. These investments are all independent and divisible.
Investment Cost of Investment NPV at 12%
Breccia 400,000 200,000 Impact 150,000 80,000 Simple 280,000 110,000 Peak 1,000,000 300,000 Bedrock 500,000 220,000 Complex 800,000 350,000 Melt 450,000 160,000
Which of the projects should they undertake and what will be the maximum NPV that they will be able to earn?
(20 marks)
(b) Finally Ltd now only have 2,000,000 to invest into the new projects. The company has decided to only consider Bedrock, Simple and Breccia as potential investments. All of the project are indivisible. However, following discussions with their bank, they have discovered that they can invest surplus funds to earn a 14% return per annum in perpetuity.
Which combination will earn the company the highest return, if their cost of funds remains at 12%?
(20 marks)
(c) sivena Limited manufactures robots and is now considering replacing its main production line with a new piece of equipment.
The new machine will cost 82,500 and it will have the following operating costs and resale values:
Year | Running Costs () | Resale value (year end) () |
1 | 19,800 | 37,400 |
2 | 26,400 | 28,600 |
3 | 35,200 | 19,800 |
4 | 40,700 | 9,900 |
The relevant costs for the old machine are as follows:
Year | 0 | 1 | 2 | 3 |
Resale Value () | 25,000 | 18,000 | 10,000 | 0 |
Extra annual operating costs () | 0 | 15,000 | 35,000 | 42,000 |
The company has a cost of capital of 14%
When is the best time to replace the old machine with the new machine? (6 marks) Total (10 marks)
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