Corporate Finance: **Kindly provide workings and clear answers.
Question 8:
(a) A project requires an initial investment in equipment of RM90,000 and
then requires an initial investment in working capital of RM10,000
You expect the project to produce sales revenue of RM120,000 per year for four years.
You estimate manufacturing costs at 60% of revenues.
The equipment will be fully depreciated using straight-line depreciation over the 4-year period.
At the end of the project, the firm expects to sell the equipment for RM8000.
The corporate tax rate is 30% and the cost of capital is 15%.
Calculate the NPV of the project.
(b) Hammer Company proposes to invest RM6 million in a new type of hammer-making equipment.
The fixed costs are RM1.0 million per year.
The equipment will be last for 5 years
The manufacturing cost per hammer is RM1 and each hammer sells for RM6.
The cost of capital is 20%.
Calculate the NPV break-even sales volume per year. (Ignore taxes. Round to the nearest 1,000).
(c) In what way does a break-even analysis help a manager decide on his investment decision?
(d) Suppose all plant and division managers are paid only a fixed salary and no other incentives or bonuses.
(i) In this situation, describe the agency problems that would appear in capital investment decisions.
(ii) What is EVA and how would tying the managers' compensation to EVA alleviate these problems?