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Assignment 2 Arkwright Mills is considering expanding its production of a new yarn, code name X15. The plant is expected to cost P1 million
Assignment 2 Arkwright Mills is considering expanding its production of a new yarn, code name X15. The plant is expected to cost P1 million and have a life of five years and a nil residual value. It will be bought, paid for and ready for operation on December 31, 20A0. Arkwright already spent P500,000 on development costs of the product, and this has been charged in the income statement in the year it was incurred. The following results are projected for the new yarn (in million Philippine pesos): Sales Costs, including depreciation Profit before tax 20A1 20A2 20A3 20A4 20A5 1.20 1.40 1.40 1.40 1.40 1.00 1.10 1.10 1.10 1.10 0.20 0.30 0.30 0.30 0.30 Tax is charged at 50 per cent on annual profits (before tax and after depreciation) and paid one year in arrears. Depreciation of the plant has been calculated on a straight-line basis. Additional working capital of P0.6 million will be required at the beginning of the project and released at the end of 20A5. All cash flows are assumed to occur at the end of the year in which they arise. Required: 1. Prepare a statement showing the incremental cash flows of the project relevant to a decision oncerning whether or not to proceed with the construction of the new plant. 2. Compute the net present value of the project using a 10 per cent discount rate. 3. Compute the payback period to the nearest year. Explain the meaning of this term.
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