management accounting

A company plans to invest in equipment that is expected to cost $1,800,000 and will incur shipping, site preparation and installation cost of $200,000,$500,000 and $300,000 respectively. The machine will have a useful life of four years and will be depreciated on a straight-line manner. The equipment can be sold for a salvage value of $200,000 at the end of its life. The investment is expected to increase sales by 200,000 units annually for the relevant period. The company sells only two products at a price of $150 per unit which incur variable cost of $50 per unit. As a result of this investment the entity will incur additional fixed cost of $13,000,000 annually of which depreciation is not included. Furthermore, the new investment will reduce contribution margin of $2,000,000 annually on existing products. All projects are evaluated based on the weighted average cost of capital which is currently 12%. All cash flows occur at the end of the period. Management wants to ascertain how viable the project is. The marginal tax rate is 25%. Required: (a) Determine the net present value of the equipment (b) Determine the profitability index (c) Determine the projects viability Warden Co plans to buy a new machine. The cost of the machine, payable immediately, is $800,000 and the machine has an expected life of five years. Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit. Incremental fixed costs arising from the operation of the machine will be $160,000 per year. Warden Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax at an annual rate of 30% per year. Capital allowances and inflation should be ignored. Required: (a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable. A company plans to invest in equipment that is expected to cost $1,800,000 and will incur shipping, site preparation and installation cost of $200,000,$500,000 and $300,000 respectively. The machine will have a useful life of four years and will be depreciated on a straight-line manner. The equipment can be sold for a salvage value of $200,000 at the end of its life. The investment is expected to increase sales by 200,000 units annually for the relevant period. The company sells only two products at a price of $150 per unit which incur variable cost of $50 per unit. As a result of this investment the entity will incur additional fixed cost of $13,000,000 annually of which depreciation is not included. Furthermore, the new investment will reduce contribution margin of $2,000,000 annually on existing products. All projects are evaluated based on the weighted average cost of capital which is currently 12%. All cash flows occur at the end of the period. Management wants to ascertain how viable the project is. The marginal tax rate is 25%. Required: (a) Determine the net present value of the equipment (b) Determine the profitability index (c) Determine the projects viability Warden Co plans to buy a new machine. The cost of the machine, payable immediately, is $800,000 and the machine has an expected life of five years. Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit. Incremental fixed costs arising from the operation of the machine will be $160,000 per year. Warden Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax at an annual rate of 30% per year. Capital allowances and inflation should be ignored. Required: (a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable