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Question 3 - Capital Investment Analysis (10 marks) The management team of OPSM is currently evaluating a proposal to overhaul testing equipment across key stores.

Question 3 - Capital Investment Analysis (10 marks)

The management team of OPSM is currently evaluating a proposal to overhaul testing equipment across key stores. Important details concerning this proposal is provided below:

  • The initial cost of the equipment will be $30 million. This cost will be depreciated using the straight line method over the 10 year life of the upgrade.
  • Staff will need to be retrained to use the new equipment. This is expected to cost $400,000.
  • Existing equipment will need to be removed and disposed of at a cost of $500,000.
  • The new equipment will increase the firm's capacity to offer eye tests. This equipment will also enable the firm to offer the leading eye test accuracy and detail on the market. Collectively, this is expected to increase the firm's revenues by $4.5 million in year 1. This will increase by 3% p.a.
  • The new equipment is expected to save the firm $400,000 in operating costs p.a.
  • At the end of years 3, 6 and 9, the new equipment will require a calibration service. Each of these services will cost $80,000.

The firm's tax rate is 30%. The firm requires a 12% required rate of return on all potential investments.

Required

In relation to the above proposal:

  1. Calculate the annual after tax cash flows (1 mark) and annual after tax profit (1 mark).
  2. Calculate the payback period (0.5 mark). with proper step by step explanation
  3. Calculate the net present value (0.5 mark)with proper step by step explanation
  4. Calculate the internal rate of return (0.5 mark)with proper step by step explanation
  5. Calculate the accounting rate of return (0.5 mark)with proper step by step explanation

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