solve a,b,c given in the image provided. Requireda. Calculate the net present value of the proposed investment in product P.b. Advise on the acceptability of the proposed investment in product P and discuss thelimitations of the evaluations you have carried out.c. Discuss how the net present value method of investment appraisal contributes towardsthe objective of maximising the wealth of shareholders. Q.2SC Co is evaluating the purchase of a new machine to produce product P, which has a shortproduct life-cycle due to rapidly changing technology. The machine is expected to cost $1million. Production and sales of product P are forecast to be as follows:Year1234Production and sales (units/year)35,00053,00075,00036,000The selling price of product P (in current price terms) will be $20 per unit, while the variablecost of the product (in current price terms) will be $12 per unit. Selling price inflation isexpected to be 4% per year and variable cost inflation is expected to be 5% per year. Noincrease in existing fixed costs is expected since SC Co has spare capacity in both space andlabour terms.Producing and selling product P will call for increased investment in working capital. Analysisof historical levels of working capital within SC Co indicates that at the start of each year,investment in working capital for product P will need to be 7% of sales revenue for that year.SC Co pays tax of 30% per year in the year in which the taxable profit occurs. Liability to taxis reduced by capital allowances on machinery (tax-allowable depreciation), which SC Co canclaim on a straight-line basis over the four year life of the proposed investment. The newmachine is expected to have no scrap value at the end of the four year period.SC Co uses a nominal (money terms) after-tax cost of capital of 12% for investment appraisalpurposes.

Scrap value is defined as the value at which a firm can sell the asset at the end of its life. The…

a. Calculate the net present value of the proposed investment in product P. b. Advise on the acceptability of the proposed investment in product P and discuss the limitations of the evaluations you have carried out. c. Discuss how the net present value method of investment appraisal contributes towards the objective of maximising the wealth of shareholders.

a. Calculate the net present value of the proposed investment in product P. b. Advise on the acceptability of the proposed investment in product P and discuss the limitations of the evaluations you have carried out. c. Discuss how the net present value method of investment appraisal contributes towards the objective of maximising the wealth of shareholders.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PB: Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated...

See similar textbooks

Similar questions

Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Kako Ltd is considering introducing a new product unto the market. This will require the injection of capital to the tune of GH¢20,000 for the purchase of the equipment for production. The cost of the building that Kako Ltd intends to use for the project is GH¢30,000. The Production and Marketing department has presented the information in the table below: 2019 Variable cost per unit of the product GH¢2 Selling price per unit GH¢6 Quantity 4000 units per annum Again the following information should be taken not of: • Feasibility studies cost the company GH¢2000 • Test marketing expenses amounts to GH¢3000 • Variable cost will increase by 5% per annum • Selling price will increase by 10% per annum • Marketing expense will be 5% of sales revenue per year • An initial working capital investment of GH¢2000 will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final…
Acme Products, Inc. is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $90 for such a widget and that 50,000 units could be sold each year at this price. If Acme Products requires a 75% return on sales to undertake production, what is the target cost for the new widget? Select one: O a. $31.50. O b. $67.50. OC. $58.50. Od. $22.50.
Trecor Co plans to buy a new machine to meet expected demand for a new product, Product T This machine will cost $250,000 and last for four years, at the end of which tume it will be sold for $5,000. Thecor Co expects demand for Product T to be as follows: Year Demand (units) 1 35.000 2 40.000 3 50,000 4 25,000 The selling price for Product T is expected to be $12.00 per unit and the variable cost of production is expected to be $7.80 per unit. Incremental annual fixed production overheads of $25,000 per year will be incurred. Selling price and costs are all in current price terms. Selling price and costs are expected to increase as follows Increase Selling price of Product T 3% per year Variable cost of production 4% per year Fixed production overheads 6% per year Other information Trecor Co has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in…
Teddy Co plans to buy a new machine to meet expected demand for a new product, Product T. This machine will cost K250,000 and last for four years, at the end of which time it will be sold for K5,000. Teddy Co expects demand for Product T to be as follows: Year 1 2 3 4 Demand (units) 35,000 40,000 50,000 25,000 The selling price for Product T is expected to be K12.00 per unit and the variable cost of production is expected to be K7.80 per unit. Incremental annual fixed production overheads of K25,000 per year will be incurred. Selling price and costs are all in current price terms. Selling price and costs are expected to increase as follows: Increase Selling price of Product T: 3% per year Variable cost of production: 4% per year Fixed production overheads:…
Show Me How Print Item Average rate of return-new product Oahu Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 40,000 units at $80 per unit. The equipment has a cost of $7,400,000, residual value of $600,000, and an 8-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor Direct materials Factory overhead (including depreciation) Total cost per unit Determine the average rate of return on the equipment. % $5 35 10 $50
Lesego Ltd is considering an investment in a new machine for the production of a new product, X. There are two possibilities, Machine A and Machine B. Both product X and the machine would have an expected life of five years.The following information is available:Product X Selling price $50Variable cost 32Increase in fixed overhead (excluding depreciation of the new machine) is $90,000 per year.YearSales units 1 10,0002 15,0003 20,0004 20,0005 5,000 Machine A Machine BInitial cost ($000) 550 480Residual value 50 30The company’s cost of capital is 10%,Required:Evaluate each machine, using the following methods:Accounting rate of return Payback;Net present value. Discuss the importance of capital budgeting in organisations.
Lesego Ltd is considering an investment in a new machine for the production of a new product, X. There are two possibilities, Machine A and Machine B. Both product X and the machine would have an expected life of five years. The following information is available: Product X Selling price $50 Variable cost 32 Increase in fixed overhead (excluding depreciation of the new machine) is $90,000 per year. Year Sales units 1 10,000 2 15,000 3 20,000 4 20,000 5 5,000 Machine A Machine B Initial cost ($000) 550 480 Residual value 50 30 The company's cost of capital is 10%, Required: a. Evaluate each machine, using the following methods: i. Accounting rate of return ii. Payback; iii. Net present value. b. Discuss the importance of capital…
HT Bowling, Inc is considering the purchase of VOIP phone system. It will require an initial investment of $16,750 and $4,750 per year in annual operating costs over the equipment's estimated useful life of 4 years. The company will use a discount rate of 9%. What is the equivalent annual cost? $9,920 O $15,110 O $12,961 O $4,723
NPV. Grady Precision Measurement Tools has forecasted the following sales and costs for a new GPS system: annual sales of 45,000 units at $16 a unit, production costs at 37% of sales price, annual fixed costs for production at $200,000. The company tax rate is 38%. What is the annual operating cash flow of the new GPS system? Should Grady Precision Measurement Tools add the GPS system to its set of products? The initial investment is $1,320,000 for manufacturing equipment, which will be depreciated over six years (straight line) and will be sold at the end of five years for $380,000. The cost of capital is 12%. What is the annual operating cash flow of the new GPS system? $ (Round to the nearest dollar.)
In order to increase production capacity, Global Industries is considering replacement an existing production machine with a new technologically improved machine effective January 1. The following information is being considered by Global Industries: • The new machine would purchased for P160,000 in cash. Shipping, installation, and testing would cost additional P30,000 • The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per unit. Incremental operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year. The investment in the new machine will require an immediate increase in working capital of P35,000. This cash outflow will be recovered at the end of year 5 • Global uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of 5 years and zero salvage value • Global is subject to a 40% corporate income tax rate Global uses the net present…
REQUIREDUse the information provided below to calculate the Accounting Rate of Return on averageinvestment (expressed to two decimal places). INFORMATIONThe management of Unicorn Limited is presently appraising the production and sale of a new product. Thiswould involve the purchase of a new machine with a cost price of R500 000. The machine is expected to havea useful life of six years and a scrap value of R100 000.Annual sales of the product are estimated to be 3 000 units at a selling price of R120 per unit. Expenses(including depreciation) are expected to amount to R80 per unit. PLEASE PUT THE ANSWER IN RANDS