GRIP Industries is considering a new assembly line costing RM1,600,000. Theinstaliation will ncur a cost of RM350,000 and after-tax training cost of RM105,000. Theassembly line will be fuly depreciated using the simplified straight-ine method over its 3-year depreciable life. Net working capital is expected to increase by RM420,000 at startand the full amount ill be recovered at the end ofup year 3. First year sales areestimated to be RM1,800,00, and illincrease by RM200,000 each year throughout the3-year period. Variable cost is 55% from sales, while fixed cost takes up RM225,000 peryear. At terminal, the assembly line can be sold at RM700,000. GRIP is in the 35 percenttax bracket and has a required rate of returm of 12%A) Calculate the total initial outlay of the project.B) Determine the annual cash flow for the project from year 1 to year 3.C) Calculate the terminal cash flow at year 3.D) Calculate the net present value (NPV) and intermal required rate of return (IRR) ofthe project. Should GRIP proceed with its plan to invest in the new assembly line?

Total Initial Outlay: It refers to the initial investment required to begin a project. These include…

Answered: A) Calculate the total intial outlay of…

A) Calculate the total intial outlay of the project. B) Determine the annual cash flow for the project from year 1 to year 3. C) Calculate the terminal cash flow at year 3.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 4P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

GRIP Industries is considering a new assembly line costing RM1,600,000. The
instaliation will ncur a cost of RM350,000 and after-tax training cost of RM105,000. The
assembly line will be fuly depreciated using the simplified straight-ine method over its 3-
year depreciable life. Net working capital is expected to increase by RM420,000 at start
and the full amount ill be recovered at the end of
up year 3. First year sales are
estimated to be RM1,800,00, and illincrease by RM200,000 each year throughout the
3-year period. Variable cost is 55% from sales, while fixed cost takes up RM225,000 per
year. At terminal, the assembly line can be sold at RM700,000. GRIP is in the 35 percent
tax bracket and has a required rate of returm of 12%
A) Calculate the total initial outlay of the project.
B) Determine the annual cash flow for the project from year 1 to year 3.
C) Calculate the terminal cash flow at year 3.
D) Calculate the net present value (NPV) and intermal required rate of return (IRR) of
the project. Should GRIP proceed with its plan to invest in the new assembly line?

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