Question
a) The Campbell Company is evaluating the proposed acquisition for a new milling machine. The machine cost shillings 108,000/= and will cost another shilling 12,500/=
a) The Campbell Company is evaluating the proposed acquisition for a new milling machine. The machine cost shillings 108,000/= and will cost another shilling 12,500/= to modify it for the special use by the firm. The machine has a life span of three years and will have a scrap value of sh. 65,000/=. The Machine will require an increase in net working capital (Inventory) of shillings 5,500/=. The milling machine would have no effect on revenues, but its expected to reduce operating costs by shillings 44, 000/= per year before tax and the companys tax rate is 35%.
Required I. Determine the cost of investment of this project (Year 0 Cash Outflow)
II. Determine the Free Cash Flow (FCF) for each of the three years
III. If the projects cost of capital is 12% using, Net Present Value (NPV) and Internal Rate of Return (IRR) advise the management if the machine should be purchased
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