James invests Rs 200,000 in a Turbo Engine that will increase production of Holé Tubes. The Engine will be depreciated on a straight-line basis for four years such that salvage value will be equal to 0 on year 4. It is expected that sales will be equal to Rs 90,000 in year 1 and it is expected that it will increase by 15% up to year 4. There is only a fixed cost of 34,000 payable every year and change in net working capital is equivalent to 142. (a) Calculate the incremental cash flows for year 0 to 4 if the company is subject to a corporate tax rate of 15%. (b) Calculate the Net Present Value using the incremental cash flows calculated in (a) and advise whether James Bombs should invest in the new machine if the interest rate is 12%.

James invests Rs 200,000 in a Turbo Engine that will increase production of Holé Tubes. The Engine will be depreciated on a straight-line basis for four years such that salvage value will be equal to 0 on year 4. It is expected that sales will be equal to Rs 90,000 in year 1 and it is expected that it will increase by 15% up to year 4. There is only a fixed cost of 34,000 payable every year and change in net working capital is equivalent to 142. (a) Calculate the incremental cash flows for year 0 to 4 if the company is subject to a corporate tax rate of 15%. (b) Calculate the Net Present Value using the incremental cash flows calculated in (a) and advise whether James Bombs should invest in the new machine if the interest rate is 12%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 2P

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