Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hello. I think I am alright with this but have gone wrong in a few places. Please provide any workings, explanations and calculations. George is

Hello. I think I am alright with this but have gone wrong in a few places. Please provide any workings, explanations and calculations.

image text in transcribed

George is currently considering the replacement of an old grinder in his workshop. The old grinder was purchased 3 years ago for $40,000. It is being depreciated using the prime (straight line) depreciation method. Its life is 5 years with no salvage value at the end of the 5th year. A trader has offered George $25,000 for the old grinder The new grinder which George would like to purchase costs $70,000. The installation cost is $5,000. This grinder would also be depreciated over 5 years using the prime method. However, at the end of the 5th year, its expected sales value is $5,000. The new grinder requires an increase of $7,550 in net working capital. Tax rate is 30%. Annual revenue and expenses before depreciation, interest and tax are estimated below: PERIOD NEW GRINDER OLD GRINDER Revenue 500,000 500,000 500,000 500,000 500,000 Revenue Year 550,000 Year 2 575,000 Year 3 600,000 Year 4 625,000 Year 5 625,000 490,000 505,000 525,000 545,000 545,000 445,000 445,000 445,000 445,000 445,000 1) 2) Calculate the initial investment associated with the new grinder Calculate the relevant (incremental) operating net cash flows. Explain why interest should not be included as a project cost. Calculate the terminal cash flows. Prepare a table with all the incremental cash flows of the project. Calculate the net present values of the incremental cash flows using costs of capital of 8.00%. 12.00%, 16.00% and 20.00 %. Comment on the change in the NPV when the cost of capital changes. Calculate the internal rate of return. If the cost of capital changes, will the internal rate of return change accordingly? At which cost of capital (analyse the four situations given in part 5) will the project be accepted? 3) 4) 5) 6) 7)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

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_2

Step: 3

blur-text-image_3

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

Contemporary Auditing Issues And Cases

Authors: Michael Chris Knapp

3rd Edition

0538891173, 9780538891172

More Books

Students also viewed these Accounting questions

Question

Computer Science - What is backtracking in data structures?

Answered: 1 week ago