A firm is considering investing in a piece of machinery for a period of 3 years....

 

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A firm is considering investing in a piece of machinery for a period of 3 years. Given the following information calculate the NPV of the proposed investment. The machinery will cost €1,200,000 and its salvage value is expected to be €500,000 in 3 years' time. The firm will depreciate the machinery to a final value of zero over the 3 year period. Any difference between the salvage value and the book value of the equipment will be treated as a taxable gain. The revenue from the factory at the end of the first year will be €300,000 and the expenses will be €75,000, both will rise with inflation thereafter which is expected to be 4% per annum. The initial investment in working capital is €6,000 and this is expected to increase by €500 after 1 year and after 2 years. The firm's corporate tax rate is 20%. Calculate the Investment Cashflows, Operating Cashflows and Working Capital Cashflows for this investment proposal. If the correct discount rate is 15%, calculate the NPV of this investment for the firm and comment on whether and why the firm should undertake this investment or not. (15 marks) b) When performing an NPV calculation for a potential investment, comment on what cashflows the investor should be careful to include within the categories above, and what cashflows they should be careful to exclude. (15 marks) A firm is considering investing in a piece of machinery for a period of 3 years. Given the following information calculate the NPV of the proposed investment. The machinery will cost €1,200,000 and its salvage value is expected to be €500,000 in 3 years' time. The firm will depreciate the machinery to a final value of zero over the 3 year period. Any difference between the salvage value and the book value of the equipment will be treated as a taxable gain. The revenue from the factory at the end of the first year will be €300,000 and the expenses will be €75,000, both will rise with inflation thereafter which is expected to be 4% per annum. The initial investment in working capital is €6,000 and this is expected to increase by €500 after 1 year and after 2 years. The firm's corporate tax rate is 20%. Calculate the Investment Cashflows, Operating Cashflows and Working Capital Cashflows for this investment proposal. If the correct discount rate is 15%, calculate the NPV of this investment for the firm and comment on whether and why the firm should undertake this investment or not. (15 marks) b) When performing an NPV calculation for a potential investment, comment on what cashflows the investor should be careful to include within the categories above, and what cashflows they should be careful to exclude. (15 marks)

Answer rating: 100% (QA)

when calculating the NVP of the proposed investment we first calculate investment cashflow operating ... View the full answer