A unit of Product T will be sold for GHe 12.00 and the variable cost of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A unit of Product T will be sold for GHe 12.00 and the variable cost of production is expected to be GHe 7.50 per unit. Incremental annual fixed production overheads of GH¢ 25 million per year will be incurred. Selling price and costs are all in current price terms but would increase as follows: Selling price of Product T: Variable cost of production: 3% per year 4% per year Fixed production overheads: 6% per year Other information Nestle Gh. has a real cost of capital of 6% and pays tax at an annual rate of 30% one year in arrears. It can claim capital allowances on a 25% reducing balance basis. General inflation is expected to be 5% per year. Nestle Gh. has a target return on capital employed of 20%. Depreciation is charged on a straight- line basis over the life of the asset. Required a. Calculate the NPV of buying the new machine and comment of your findings (work to the nearest million). b. c. Calculate the before - tax return on capital employed (ARR) based on the average investment and comment on your findings. Discuss the strengths and weaknesses of IRR in appraising capital investments. . Nestle Gh. plans to buy a new machine to meet expected demand for a new product, Product T. This machine will cost GHe 250 million and last for four years, at the end of which time it will be sold for one-fifth the cost. Nestle Gh. expects demand for Product T to be as follows: Year 1 Demand (units) 35 million 2 40 million. 3 50 million 4 25 million A unit of Product T will be sold for GHe 12.00 and the variable cost of production is expected to be GHe 7.50 per unit. Incremental annual fixed production overheads of GH¢ 25 million per year will be incurred. Selling price and costs are all in current price terms but would increase as follows: Selling price of Product T: Variable cost of production: 3% per year 4% per year Fixed production overheads: 6% per year Other information Nestle Gh. has a real cost of capital of 6% and pays tax at an annual rate of 30% one year in arrears. It can claim capital allowances on a 25% reducing balance basis. General inflation is expected to be 5% per year. Nestle Gh. has a target return on capital employed of 20%. Depreciation is charged on a straight- line basis over the life of the asset. Required a. Calculate the NPV of buying the new machine and comment of your findings (work to the nearest million). b. c. Calculate the before - tax return on capital employed (ARR) based on the average investment and comment on your findings. Discuss the strengths and weaknesses of IRR in appraising capital investments. . Nestle Gh. plans to buy a new machine to meet expected demand for a new product, Product T. This machine will cost GHe 250 million and last for four years, at the end of which time it will be sold for one-fifth the cost. Nestle Gh. expects demand for Product T to be as follows: Year 1 Demand (units) 35 million 2 40 million. 3 50 million 4 25 million
Expert Answer:
Answer rating: 100% (QA)
A a Calculate the NPV of buying the new machine and comment of your findings work to the nearest mil... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
Posted Date:
Students also viewed these finance questions
-
A unit of product X requires 24 active labour hours for completion. It is anticipated that there will be 20% idle time which is to be incorporated into the standard times for all products. If the...
-
Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,000 per year, and variable costs are $60 per unit. The initial investment of $3,000 will be...
-
Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,000 per year and variable costs are $60 per unit If the project requires an initial...
-
The built-up shaft is designed to rotate at 450 rpm. If the radius of the fillet weld connecting the shafts is r = 13.2 mm, and the allowable shear stress for the material is Ï allow = 150 MPa,...
-
Assume that you are purchasing an investment and have decided to invest in a company in the smartphone business. You have narrowed the choice to LX Electronics or Rose Corporation and have assembled...
-
Li- Na and Shirley both live two periods. Both have earnings of 1,000 in the present and zero in the future. The interest rate is 8 percent. Suppose that they are each subject to an income tax, and...
-
A major purpose of the Information Systems Audit and Control Foundation's publication called COBIT: Control Objectives for Information and Related Technologies is: a. To establish a basis for a...
-
Kellogg Company is the world's leading producer of ready-to-eat cereal products. In recent years the company has taken numerous steps aimed at improving its profitability and earnings per share....
-
This is the link for the article ottawacitizen.com/news/local-news/city-must-get-creative-to-pay-for-o-train-to-riverside-south Answer the following questions after reading the article: 1. Why is...
-
Portfolio return and standard deviation David Choo is thinking of building an investment portfolio containing two stocksH and G. He has assigned 40% of his portfolio to stock H and the remaining 60%...
-
A disscussion on how the cultural factors may effect international consumers in the context of hospitality anf food service industry. provide evidence base on your research.
-
Cane Company manufactures two products called Alpha and Beta that sell for $215 and $160, respectively. Each product uses only one type of raw material that costs $7 per pound. The company has the...
-
Factory overhead absorption rate of Ali Manufacturing Company is Rs. 3 per hour. Budgeted overhead for 10,000 hours per month is Rs. 30,000 and for 16,000 hours per month is Rs. 42,000. Actual...
-
A large, downtown hotel allocated all of its restaurant labor costs on the basis of revenue dollars. This hotel had seven restaurant outlets that were vastly different, including banquet, room...
-
1) Why do companies do Budget? What are the problems a company might experience if it disregards the budgeting procedures? 2) The principal purpose of the cash budget is to see how much cash the...
-
Explain the business market purchase decision process by taking a fictional company through the six stages of the process
-
Balance sheet preparation Use the appropriate items from the following list to prepare in good form Mellark's Baked Goods balance sheet at December 31, 2019. Complete the fragment of the balance...
-
What are the principal alloying elements in SAE 4340 steel?
-
The following table shows an abbreviated income statement and balance sheet for McDonald's Corporation for 2012. INCOME STATEMENT OF MCDONALD'S CORP., 2012 (Figures in $ millions) Net sales...
-
The $40 million lottery payment that you have just won actually pays $2 million per year for 20 years. The interest rate is 8%. a. If the first payment comes in I year, what is the present value of...
-
River Cruises' management now understands that the trade-off theory of optimal capital structure implies managers will increase debt as long as the value of additional interest tax shields exceeds...
-
A directed graph has the adjacency matrix below. Use the Breadth First Tree function to find a directed spanning tree. Determine the root using the Descendants function....
-
Repeat Exercise 16 for the graph whose adjacency matrix is above. The root vertex is 7 .
-
Prove or disprove. A directed graph is a tree if and only if it is connected and has no directed cycles.
Study smarter with the SolutionInn App