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Curly Ramen Pte Ltd is a factory that manufactures instant noodles. The company has completed a research exercise amounting to $ 5 , 2 0
Curly Ramen Pte Ltd is a factory that manufactures instant noodles. The company has completed a research exercise amounting to $ to improve its production process. Due to the outcome of the research, it is now considering purchasing new machines to replace its older machines.
The new machines will cost $ altogether, and incur an additional installation expense of $ The old machines can be sold now for a proceed of $ but required a disposal fee of $
The table below shows the cash revenue and expenses for the existing machines:
tableYearCash Revenue,Cash Expenses
The cost of capital for the company is
Required:
a Calculate the initial investment for the proposed machines.
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b It is estimated that the new machines are expected to increase cash revenue by and expenses by respectively. Calculate the following:
i Operating cash inflows for the existing machines.
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ii Operating cash inflows for the proposed new machines.
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iii. Incremental cash flows for the project.
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c i Calculate the Net Present Value for the proposed project.
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ii Should the company continue to operate the old machine or purchase the new machine? State your reason.
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d i Explain what is sunk cost and it's relevance to investment decisions.
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ii Identify a sunk cost from the case above.
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e If the Internal Rate of Return IRR for the project is should the company accept or reject the project solely based on the IRR technique? State your reason. marks
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