Please Show ALL Workings VERY Clearly! Hemas PLC is planning to invest in a project today which will operate for four years. Thecompany had incurred a research cost of Rs. 75,000/= 2 years back on this project. Theproject requires an initial investment of Rs. 900,000/= today. The below table shows theprojected accounting information.Year 01Year 02Year 03Year 04Sales470,000520,000600,000750,000(100,000)(60,000)(-) Raw Material(125,000)(200,000)(210,000)(-) Employee Salaries(-) Depreciation(-) Provision for future losses(60,000)(65,000)(70,000)(110,000)(110,000)(110,000)(110,000)(15,000)(15,000)(15,000)(15,000)185,000210,000210,000345,000After computing the NET cash flows from the project for all the 4 years, determine net presentvalue (NPV), payback period and the discounted payback period, assuming the cost of capital to be12%.

Net cash flows: Net cash flows are computed as the sum of EBIT and depreciation since taxes are not…

Hemas PLC is planning to invest in a project today which will operate for four years. The company had incurred a research cost of Rs. 75,000/= 2 years back on this project. The project requires an initial investment of Rs. 900,000/= today. The below table shows the projected accounting information. Year 01 Year 02 Year 03 Year 04 Sales 470,000 520,000 600,000 750,000 (-) Raw Material (100,000) (125,000) (200,000) (210,000) (-) Employee Salaries (-) Depreciation (-) Provision for future losses (70,000) (60,000) (110,000) (60,000) (110,000) (65,000) (110,000) (15,000) (110,000) (15,000) (15,000) (15,000) 185,000 210,000 210,000 345,000 After computing the NET cash flows from the project for all the 4 years, determine net present value (NPV), payback period and the discounted payback period, assuming the cost of capital to be 12%.

Hemas PLC is planning to invest in a project today which will operate for four years. The company had incurred a research cost of Rs. 75,000/= 2 years back on this project. The project requires an initial investment of Rs. 900,000/= today. The below table shows the projected accounting information. Year 01 Year 02 Year 03 Year 04 Sales 470,000 520,000 600,000 750,000 (-) Raw Material (100,000) (125,000) (200,000) (210,000) (-) Employee Salaries (-) Depreciation (-) Provision for future losses (70,000) (60,000) (110,000) (60,000) (110,000) (65,000) (110,000) (15,000) (110,000) (15,000) (15,000) (15,000) 185,000 210,000 210,000 345,000 After computing the NET cash flows from the project for all the 4 years, determine net present value (NPV), payback period and the discounted payback period, assuming the cost of capital to be 12%.

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 3CMA

See similar textbooks

Similar questions

Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
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?
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. 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?
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of 50 million on a large-scale, integrated plant that will provide an expected cash flow stream of 8 million per year for 20 years. Plan B calls for the expenditure of 15 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of 3.4 million per year for 20 years. The firms cost of capital is 10%. a. Calculate each projects NPV and IRR. b. Set up a Project by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. What are the NPV and the IRR for this Project ? c. Graph the NPV profiles for Plan A, Plan B, and Project .
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?
Gallant Sports s considering the purchase of a new rock-climbing facility. The company estimates that the construction will require an initial outlay of $350,000. Other cash flows are estimated as follows: Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the rock-climbing facility. Should the company develop the facility if the required rate of return is 6%?
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?