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Jonken co is a private company based in Kitwe. The company is considering investing into a project that will be producing belts to be sold
Jonken co is a private company based in Kitwe. The company is considering investing into a project that will be producing belts to be sold to the mining companies. The project will demand that the company buys a special equipment that costs K from South Africa to replace the old machine which have a book value of K The old machine has one year of economic life with expected scrap value of zero. The equipment have expected useful life of years with K scrap value. Jonken uses straight line method of depreciation to depreciate its NonCurrent Assets and claims tax allowances at per year reducing balance. Installations costs of K will also be incurred before the project starts but will be paid for next year when the equipment starts operating.
The belts are expected to cost the company K each to take to the market and will be sold for K each. It is estimated that the cost per belt will be increasing by compounded each year and selling price by compounded each year.
The company expects to sell units in the first year,rising to in year and in year before rising back to for each of years and
At the beginning of the project, it is expected that there will be K of inventory required. At the same time accounts receivables will be K and accounts payable of K The net working capital will be maintained at of total sales revenue per year until the end of the project.
To sell the projected units, the company will need to advertise and the advertising costs are estimated at K in the first year and followed by K per year thereafter.
The company faces a tax rate of Tax is paid one year in arrears. The cost of capital is expected to remain at
Required:
a Calculate the initial investment outlay of the project Marks
b Calculate the terminal cash flow for the project. marks
cLay out the relevant cash flows for the project Marks
d Calculate Net Present Value NPV for the project and advise on its acceptability
Marks
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