Question
Bhimsen company is considering investing in a machine to produce bowling balls. The building which will be used in the production process can be sold
Bhimsen company is considering investing in a machine to produce bowling balls. The building which will be used in the production process can be sold for an after-tax amount of 1,50,000 (either right now or at the end of 5 years). The cost of the machine is 1,00,000 and it is expected to last 5 years. At the end of 5 years, the machine will be sold at the estimated value of 30,000. The machine can be depreciated on a straight-line basis to value of 20,000. The production units during 5 year of machine life will be 5000, 8000, 12000, 10000 and 6000 units. The price of bowling balls will start at Rs 20 per unit in year 1 and will grow at 2% per year. The production cost will be Rs 10 per unit in year 1 and will grow at 10% per year. The project requires an immediate (year 0) investment in working capital of 10,000. The net working capital every year is 10% of sales. All WC is returned in the last year. The tax rate is 34%. Discounting rate is 10%.
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