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Question 2 [20] ABC limited gets an opportunity of investment by Decision Management Consultants (DMC). The project requires an initial investment to purchase the machinery
Question 2 [20] ABC limited gets an opportunity of investment by Decision Management Consultants (DMC). The project requires an initial investment to purchase the machinery of $ 500,000 for this project. They have provided you with the following data regarding the project Year Revenues Cost Overheads 1 $ 250,000 $ 100,000 $ 50,000 2 $ 300,000 $ 110,000 $ 70,000 3 $ 400,000 $ 180,000 $ 60,000 4 $ 500,000 $ 250,000 $ 50,000 5 $ 600,000 $ 300,000 $ 60,000 Machinery will be depreciated at 20% on cost each year. Tax rate is 30 % Required: a) If the weighted average cost of capital is 10%, should the business invest in this project. Support your decision with the help of capital budgeting techniques. (Net Present Value, Payback period, Profitability Index) Additional information: Due to some circumstances, weighted average cost of capital is increase to 20% b) Should the business now invest in this project at the rate of 20%? [3] c) Calculate Internal Rate of Return (IRR) [3] d) Which of the capital budgeting technique you consider is the most appropriate for evaluation of a project? Give reasons for your answer in detail. [4] [10]
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