Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

QUESTION ONE ETM Co is considering investing in machinery costing K150,000 payable at the start of first year. The new machine will have a three-year

QUESTION ONE ETM Co is considering investing in machinery costing K150,000 payable at the start of first year. The new machine will have a three-year life with K60,000 salvage value at the end of 3 years. Other details relating to the project are as follows. Year 1 2 3 Demand (units) 25,500 40,500 23,500 Material cost per unit K4.35 K4.35 K4.35 Incremental fixed cost per year K45,000 K50,000 K60,000 Shared fixed costs K20,000 K20,000 K20,000 The selling price in year 1 is expected to be K12.00 per unit. The selling price is expected to rise by 16% per year for the remaining part of the projects life. Material cost per unit will be constant at K4.35 due to the contract that ETM has with its suppliers. Labor cost per unit is expected to be K5.00 in year 1 rising by 10% per year beyond the first year. Fixed costs (nominal) are made of the project fixed cost and a share of head office overhead. Working capital will be K35,000 per year throughout the projects life. At the end of three years working will be recovered in full. ETM pays tax at an annual rate of 35% payable one year in arrears. The firm can claim capital allowances (tax-allowable depreciation) on a 20% reducing balance basis. A balancing allowance is claimed in the final year of operation. ETM uses its after-tax weighted average cost of capital of 15% when appraising investment projects. The target discounted payback period is 2 years 6 months. Required: a) Calculate the net present value of buying the new machine and advise on the acceptability of the proposed purchase (work to the nearest K1). b) Calculate the internal rate of return of buying the new machine and advise on the acceptability of the proposed purchase (work to the nearest K1). c) Calculate the discounted payback period of the project and comment on the results. d) Briefly discuss why good projects are very difficult to find as well as challenging to maintain or sustain

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Financial Theory

Authors: Jean-Pierre Danthine, John B. Donaldson

3rd Edition

0123865492, 9780123865496

More Books

Students also viewed these Finance questions

Question

7. Define cultural space.

Answered: 1 week ago

Question

8. Describe how cultural spaces are formed.

Answered: 1 week ago