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Dhiya Investments is intending to invest in a new manufacturing plant and gave you the following information: Cost of purchasing the plant is $770 000
Dhiya Investments is intending to invest in a new manufacturing plant and gave you the following information: Cost of purchasing the plant is $770 000 and transportation of the plant to the site will be $130 000. The plant will cost $100 000 to install and will be depreciated at the rate of 10% p.a. using the straight line method. Dhiya Investments expect to use the plant for five years of which it expect to dispose it for $200 000. The plant will produce annual net incomes of $220 000 in year 1, $300 000 in years 2 through to year 4 and $40 000 in year 5. The given annual net incomes are after deduction of depreciation for the purposes of levying corporate tax. The company requires a 13% rate of return on its capital and its AAR is pegged at 25%. The management of Dhiya Investments also agreed that they will only invest in the project if it has a payback period of three years six months or less. As an investment management student, the management of Dhiya Investments has approached you for advice whether to invest or not invest in the project using each of the following
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