Question
Consultant for a company has to decide if the company should invest The investment is 100000000 (100 million dollars) The service life is 4 years
Consultant for a company has to decide if the company should invest
The investment is 100000000 (100 million dollars)
The service life is 4 years
Product is depreciated on a straight-line basis at this time and therefore no residual value is calculated
It is estimated that units sold will be 75000 in year 1 and then increase by 10% per year for the next 3 years (until the end of product life)
The sale price is $ 1000 per unit
Variable costs are 45% of revenue each year
The fixed cost is $ 10 million a year
There will be an increase in the tied-up stock (working capital) of two million dollars at the beginning of the investment (t = 0) which will then be returned at the end of the product's life.
Yield is 10%
Income tax percentage is 20%
1) Prepare a profit and loss account for this investment
2) Bring out the annual "free" cash flow that comes from this investment
3) Calculate the net present value (NVP) for the investment and what the highest rate of return may be in order to approve the project
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
1 2 3 Sales Price per unit 4 Variable Cost per unit 5 Unitssold 6 Contribution 7 Fixed Cost Particul...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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