Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Eureka Inc. manufactures a spare part Brighto. During the year 2021, the company is evaluating the three investment alternatives: Project RED : Produce a new

Eureka Inc. manufactures a spare part “Brighto”.

During the year 2021, the company is evaluating the three investment alternatives:

Project RED: Produce a new range of products,

Project GREEN: Expansion of its existing product range.

Project BLUE: Develop a new high-quality production plant.

Any of the investment decision shall be implemented from 1st January 2022.

If only one project is undertaken, the expected investments and cash inflows are as under:

Project

Expected Net Cash Inflows (Including Salvage Value)

(Million $)

Initial Outlay

(Million $)

Year

2022

Year

2023

Year

2024

Year

2025

Year

2026

Red

Green

Blue

60

75

50

69

60

63

70

70

52

60

Nil

75

60

Nil

Nil

225

160

175

  • If projects Red & Green are jointly undertaken, there shall be no savings in investments required and also the net cash inflows shall remain the same.
  • If projects Green and Blue are jointly undertaken, savings are possible only in investment because of the machines acquired can be used in both production processes. The combined investment required for projects Green & Blue is $334 million.
  • If projects Red & Blue are jointly undertaken, there are combined savings of $0.5 million each year to be achieved in marketing expenses and production cost of the products but no savings are expected in investments.
  • If all the three projects are taken simultaneously, all the savings given above shall be achieved jointly, however, an extra $5 million extension cost for the production plant will be necessary on January 01, 2022, as space and capacity are not available for all three projects.

Eureka Inc.’s WACC is 11½ %.

REQUIREMENT (A): Calculate PBP, DPBP, NPV, PI and IRR for each single project and for each combination of projects, if Tax Rates, Inflation Rates and Salvage values of all projects are Nil. Also, decide which single project or a combination of projects is more beneficial.

REQUIREMENT (B): Calculate PBP, DPBP, NPV, PI and IRR for each single project and for each combination of projects, if Tax Rates and Salvage values of all projects are Nil. The inflation rate for all projects for all years and for all components is 5%. Also, decide which single project or a combination of projects is more beneficial.

REQUIREMENT (C): Calculate PBP, DPBP, NPV, PI and IRR for each single project and for each combination of projects, if Tax Rate is 10% and salvage value is taxable. Salvage Values of Project Red, Green and Blue are $6, $4 and $2 (in millions), respectively. The Inflation Rate is Nil for all projects. Also, decide which single project or a combination of projects is more beneficial.

Step by Step Solution

3.51 Rating (161 Votes )

There are 3 Steps involved in it

Step: 1

PBP Present Value of Cash Inflows Present Value of Cash Outflows DPBP Discounted Present Value of Cash Inflows Discounted Present Value of Cash Outflo... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cornerstones Of Cost Management

Authors: Don R. Hansen, Maryanne M. Mowen

3rd Edition

9781305147102, 1285751787, 1305147103, 978-1285751788

More Books

Students also viewed these Programming questions

Question

What is a manufacturing system?

Answered: 1 week ago