A Plastic manufacturer has under consideration the proposal of production of high quality plastic glasses. The necessary equipment to manufacture the glasses would cost Rs 1,080,000. The production equipment would last five years with salvage value of Rs 80,000. It is also estimated that an additional investment in working capital would be required at start of project amounted to Rs 500,000. The glasses can be sold at Rs 30/- each. Regardless of level of production, the manufacturer will incur cash cost of Rs 450,000 each year. The variable cost is estimated at Rs 18.0 per glass. The manufacturer estimates it will sell about 65000 glasses in first year and there will be increase of 5% per year for next four years. Fixed cost is also expected to increase 8% per year but no change in variable cost is expected. The straight line method for depreciation will be used; the ordinary tax rate is 45%. Should the proposed equipment be purchased? Assume cost of capital is 20%.

A Plastic manufacturer has under consideration the proposal of production of high quality plastic glasses. The necessary equipment to manufacture the glasses would cost Rs 1,080,000. The production equipment would last five years with salvage value of Rs 80,000. It is also estimated that an additional investment in working capital would be required at start of project amounted to Rs 500,000. The glasses can be sold at Rs 30/- each. Regardless of level of production, the manufacturer will incur cash cost of Rs 450,000 each year. The variable cost is estimated at Rs 18.0 per glass. The manufacturer estimates it will sell about 65000 glasses in first year and there will be increase of 5% per year for next four years. Fixed cost is also expected to increase 8% per year but no change in variable cost is expected. The straight line method for depreciation will be used; the ordinary tax rate is 45%. Should the proposed equipment be purchased? Assume cost of capital is 20%.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1eM

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