A firm is charged P150 per ton for hauling its raw materials by a trucking company. Forty tons per day are hauled for 300 days a year. It is a desired to install a railway system which would bring down the cost of,hauling to P6.60 per ton. Maintenance cost of this is P12,000 per month. Tax is 1%. Average rate of earning is 20%. (a) If the company has the cash necessary for the installation would you recommend the change? (b) If the company has to float P5,000,000 worth of non callable bonds at 15% that will mature in 10 years to have the capital. for the project, would you recommend the change?
A firm is charged P150 per ton for hauling its raw materials by a trucking company. Forty tons per day are hauled for 300 days a year. It is a desired to install a railway system which would bring down the cost of,hauling to P6.60 per ton. Maintenance cost of this is P12,000 per month. Tax is 1%. Average rate of earning is 20%. (a) If the company has the cash necessary for the installation would you recommend the change? (b) If the company has to float P5,000,000 worth of non callable bonds at 15% that will mature in 10 years to have the capital. for the project, would you recommend the change?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 3P
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A firm is charged P150 per ton for hauling its raw materials by a trucking company. Forty tons per day are hauled for 300 days a year. It is a desired to install a railway system which would bring down the cost of,hauling to P6.60 per ton. Maintenance cost of this is P12,000 per month. Tax is 1%. Average rate of earning is 20%.
(a) If the company has the cash necessary for the installation would you recommend the change?
(b) If the company has to float P5,000,000 worth of non callable bonds at 15% that will mature in 10 years to have the capital. for the project, would you recommend the change?
Ans. (a)
(b) Rate of return is 10.61% investment is not justified.
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