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Question 11: Capital Budgeting ted is a manufacturer of machine equipment product. The senior management has revolutionizing the machine ocated a total proposed the purchase of a new set of manufacturing plant that would aid in equipment manufacturing process, and also the company's products. The company has al capital budget of $55,000,000 maximum A consultant has been engaged by the company, and has provided the following summary New equipment if purchased will cost $42,500,000 Old equipment -currently planned to be sold for $1,300,000 in four years - could be sold immediately for a salvage value of $4,500,000. It is estimated that the purchase of the new equipment will result in an increase of sales of S12,650,500 per year. Variable costs will also increase by S5.114,600 per year if the new equipment is purchased. Fixed costs will remain constant. . If the new equipment is purchased, then this will increase the level of inventory immediately by The new equipment is estimated to have a useful life of four years and will depreciated to zero The cost of the report from the consultant was $1,500,000. S2,880,000 whilst accounts receivable will decline by $4,200,500 and accounts payable by $2,650,000. during that span using straight-line depreciation. At the end of five years, it is estimated the salvage value on the new equipment will be $2,595,000. .If the new equipment is purchased, it will result in an external rise in sales of a subsidiary to the value of $1,502,000 per year The weight average cost of capital ofthe company is estimated to be 8%. Ignore taxation. Required (1) Calculate the net present value of proposed purchase of the new equipment. (2) Based on your calculation in Part (1), is the internal rate of return (IRR) of the project higher or lower. Justify your answer. (3) One of the senior management is concerned that the consultant's calculation of the weighted- average cost of capital is too high and suggests applying a lower rate. If a lower rate is used, what will be the impact on the NPV you calculated in Part (1). (4) Another director has suggested the company should invest in another set of equipment that would be independent of the initial suggestion. The director has said the alternative equipment to be purchased would yield an IRR of 14.5%. Based on the weighted-average cost ofcapital calculated ernative proposition from the director? Justify by the consultant, would you accept or reject the alt your answer (5) A juni revol th Assuming the initial suggested (1)), would or executive has also suggested it would be more optional for the company to invest in a lutionary piece of machinery that would yield a significantly higher positive NPV than any of e other suggested projects. The initial outlay for this revolutionary equipment is $62,600,000. purchase yielded a positive NPV (ignore your computation in Part you support the purchase recommended by the junior IT executive? Justify your answer. 15