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Peru Ltd is considering expanding its business but it is not sure if this will achieve its objective of maximising shareholder wealth. It is a
Peru Ltd is considering expanding its business but it is not sure if this will achieve its objective of maximising shareholder wealth. It is a privately owned company and its shareholders want a return of 14% The company is considering several investment opportunities and has decided to consider the Expansion project first. It is currently operating in a building that cost 5 million when they bought it 6 years ago. The expansion project would cost 2 million immediately which would involve a new warehouse. The management accountant supplied yearly figures showing the increase in cashflow arising as a result of the expansion Years 1-3 Annual Cashflow (sales less expenses) 500,000 Years 4-5 Annual Cashflow (sales less expenses) 350,000 The owners of the business have decided that they will sell the factory and warehouse at the end of year 5. You also discover that during year 1 working capital of 150,000 is required. This working capital is no longer required when the business is sold at the end of year 5. It is estimated that the sale value in 5 years of the existing factory is 3 million and the warehouse is 0.4 million. Required: Calculate the NPV if the discount factor is 10%. Calculate the NPV if the discount factor is 20%. Calculate the Internal Rate of Return. State if this project should be recommended and briefly give your reasons
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