Q10

A company is considering investing in a piece of equipment that costs $350,000. The equipment will have a useful life of 5 years and will generate additional revenues of $90,000 per year. Annual operating costs will be $20,000. The company’s tax rate is 40% and it uses a discount rate of 11%. The present value factors for 11% are:

Year	PV Factor
1	0.901
2	0.812
3	0.731
4	0.659
5	0.593

Requirements:

1. Calculate the annual net cash flow after tax.
2. Determine the present value of the cash flows.
3. Compute the NPV of the equipment investment.
4. What is the payback period?
5. Should the company invest in the equipment? Provide reasons based on financial metrics.

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Question 1

A manufacturing company is evaluating a project that requires an investment of $500 lakhs in machinery. The project is expected to generate the following cash flows over the next five years:

Year	Cash Flow (Rs. in lakhs)
1	100
2	150
3	200
4	250
5	300

The cost of capital for the company is 10%, and the machinery will have a salvage value of Rs. 50 lakhs at the end of year 5. The project will also incur annual operating costs of Rs. 50 lakhs. Depreciation is calculated on a straight-line basis. The company is subject to a 30% tax rate.

Required:

1. Calculate the Net Present Value (NPV) of the project.
2. Determine the Internal Rate of Return (IRR) of the project.
3. Calculate the Payback Period.
4. Compute the Accounting Rate of Return (ARR).
5. Advise the management on whether to accept or reject the project.