GoldstoneThe management of goldstone are considering the purchase of new equipment which would allow the company to expand its operations for three years. Details are as follows:The equipment will cost £1.2 million and it is anticipated it will be sold for £620,000 three years later.The sales volume generated by the new machine would be at a steady 88,000 units per year; the selling price will be kept at £40 and variable costs are estimated at £25 per unit for all three years.Additional premises will be rented at a cost of £280,000 pa, payable on the first day of each year.Working capital equal to 10% of sales revenue will need to be in place at the start of each year.The equipment will qualify for capital allowances, which are at a rate of 18% on a reducing balance basis, with a balancing allowance or charge on disposal.The company pays tax at 20%, has a cost of capital of 10% and always works to the nearest £1,000.By calculating the NPV of the project, advise the management on whether the potential investment appears beneficial.

Net present value shows the difference between the present value of cash flow and the present value…

Answered: NPV of the project

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

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Goldstone

The management of goldstone are considering the purchase of new equipment which would allow the company to expand its operations for three years. Details are as follows:

The equipment will cost £1.2 million and it is anticipated it will be sold for £620,000 three years later.
The sales volume generated by the new machine would be at a steady 88,000 units per year; the selling price will be kept at £40 and variable costs are estimated at £25 per unit for all three years.
Additional premises will be rented at a cost of £280,000 pa, payable on the first day of each year.
Working capital equal to 10% of sales revenue will need to be in place at the start of each year.
The equipment will qualify for capital allowances, which are at a rate of 18% on a reducing balance basis, with a balancing allowance or charge on disposal.
The company pays tax at 20%, has a cost of capital of 10% and always works to the nearest £1,000.

By calculating the NPV of the project, advise the management on whether the potential investment appears beneficial.

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