Question
An investment in an item of equipment would cost GH150,000. It is estimated that sales in the first year would be GH120,000 rising by 10%
An investment in an item of equipment would cost GH150,000. It is estimated that sales in the first year would be GH120,000 rising by 10% a year for the next four years. Variable costs would be 50% of sales. Annual fixed costs would be GH40,000 in the first three years, rising to GH60,000 in years 4 and 5. Fixed costs of 60% would be avoidable if the project did not go ahead. The scrap value of the equipment at the end of year 5 would be GH10,000. The project would also require an investment in working capital of GH30,000 at the start of year 1 rising to GH40,000 at the start of year 2 and to GH50,000 at the start of year 4. The companys cost of capital is 9%. Required: Calculate the NPV of the project and suggest whether it should be undertaken.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started