Your personal banker added a clause in the contract. To be entitle for the loan, the business shouldyield a positive NPV.To set up the business, you will be required to purchase an equipment costing Rs 60,000.00. Youexpect inventory will increase by Rs 18,000.00 and accounts payable will increase by Rs5000.00.All the other working capital components will stay the same. So the change in net operatingworking capital is Rs 13,000.00 at t=0.You expect to keep the company for 4 years and you expect to sell 20,000.00 units of peanut butterat a unit price of Rs35.00 and believe that both prices and quantity will remain the same. The fixedcost is Rs 7,000 every year and variable costs will be Rs1.03 per unit. You plan to use the straight-line depreciation and the equipment will be fully depreciated after 4 years. The salvage value isRs24, 000 and tax rate is 23%1. What are the incremental cash flows for the 4 years2. If the WACC is 11%, will you get the loan?

The NPV analysis is used to measure a project's profitability. It takes into account the time value…

Answered: Your personal banker added a clause in…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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suppose that you have started a manufacturing/Service Organization in Abu Dhabi UAE with a capital of $250000 1-you need to assume cash flows with assumed discounted rate for five years and calculate the NPV of the project. 2- Find out the BEP (Break Even Point) of your business and take necessary actions on the basis of your results.
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