Question
Smith Ltd is considering a new plant at a cost of R20 million. This plant will generate sales revenue of R15 million in the
Smith Ltd is considering a new plant at a cost of R20 million. This plant will generate sales revenue of R15 million in the first year, R12 million in the 2nd year and R12 million in the third year. The company expect to achieve an operating of 40% of sales revenue. Investment in working capital will amount to R5million at the beginning of the period, and which is recoverable at the end of 3 years. The company's cost of capital is 13%. The company will qualify for depreciation deduction of 20% per annum on a straight-line basis. The corporate tax is 28%. Advise if this project should be accepted and give reasons. Calculate the Net present Value (15 marks) Calculate the Internal rate of return (IRR) (3 marks) Advise (2 marks)
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