Question
ABC limited is considering implementing a project X (New manufacturing machine). The following data has been provided in respect of the project 1. The cost
ABC limited is considering implementing a project X (New manufacturing machine). The following data has been provided in respect of the project
1. The cost of the project is Sh. 2 Million
2. The WACC of the company is 12%
3. The useful life of the project is 5 years
4. Depreciation method is straight line
5. Salvage value is expected to be Sh. 200,000
6. Incremental quantity produced and sold is 100,000 units
7. Variable cost per unit is Sh. 60
8. Tax rate is 30%
9. Contribution margin is Sh. 40
10. Fixed costs have been estimated at Sh. 500,000
Required: (i) Estimate the net cash flow from the project for years 1, 2, 3, 4 and 5
(ii) Estimate the Net Present Value of the project
(iii) Advise the company based on the Net Present Value (NPV)
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