Question
K Plc. considers a new investing project for 4 years. To decide which market to target, the firms also paid $12,000 to Think Big, a
K Plc. considers a new investing project for 4 years. To decide which market to target, the firms also paid $12,000 to Think Big, a consultancy firm. This project requires an initial investment in working machine of $320,000. The machine is supposed to be fully depreciated over the life of the project (4 years) using straight line method. The company expects to sell the machine at the end of the 4th year for 20% of its initial value but would have to pay $3,000 for deconstructing service. Biology plc. forecasts revenues in the first year of $300,000 and the revenues increase by 10% every year. The operating costs constitute 62.5% of revenues. The working capital required in each year is expected to be 20% of revenues in the following year. Given that the corporate tax rate is 30%, and the required rate of return is 9.6%. Requirements a. Calculate project cashflows b. Calculate payback period, NPV and IRR of the project and give investment recommendation. c. Briefly discuss the pitfalls of IRR
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