Question
Souled Ltd is thinking of introducing a new line of footwear, for which it has decided to purchase new machinery. Tandem Manufacturers are offering their
Souled Ltd is thinking of introducing a new line of footwear, for which it has decided to purchase new machinery. Tandem Manufacturers are offering their machinery at Rs 50 lakhs. The machinery is said to have a life cycle of 10 years. Souled has already pitched their idea to several department stores, boutiques and online stores and the response has been positive. They estimate an annual return of Rs 5 lakhs per year for the first 3 years, and 10 lakhs per annum for the next 3, and Rs 20 lakhs every year for the remaining 4 years. The estimated operating costs of the machine are Rs 3 lakhs per annum. The WACC of Souled Ltd is 10 % p.a. and corporate tax rate is 30 %. The company is very profitable, so any accounting losses on this project can be used to reduce the companys overall tax burden.
Calculate a) NPV b) IRR c) MIRR d) Payback Period.
Do you think it makes sense to go ahead with the introduction of the new footwear line? Explain in your own words the reason for your final conclusion
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