5. HZ Co is appraising an investment project which has an expected life of four. The...

 

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5. HZ Co is appraising an investment project which has an expected life of four. The initial investment, payable at the start of the first year of operation, is $6.4 million. The scrap value is expected to be 15% of the initial investment and it is expected to arise at the end of four years. Forecast sales and production volumes have already been forecast, as follows: Year 1 2 3 4. Sales and production (units) 150,000 200,000 250,000 300,000 The current selling price per unit is $100 and it is expected to be subject to annual inflatioñ of 10% per year. The variable cost per unit is currently at $80 and it is expected to increase by $8 every year. Fixed overheads of $2,500,000 per year in current price terms will arise as a result of undertaking the investment project and for this an inflation of 20% per year is expected. The initial investment will attract tax-allowable depreciation on a reducing balance method at 25% over the four- year project life. The rate of corporation tax is 30% and tax liabilities are paid one year in arrears. HZ Co uses a nominal after-tax discount rate of 10% per year for investment appraisal. Required a. Calculate the expected net present value of the investment project using a nominal (money terms) approach and comment on its financial acceptability. b. Determine the internal rate of return of this investment project. D. Determine the internal Tate of retum of tiis investnent proje 6. Banden is a highly geared company that wishes to expand its operations. Six possible capital investments have been identified, but the company only has access to a total of $620,000. The projects are not divisible and may not be postponed until a future period. Expected net cash inflows (indluding salvage value) Initial outlay $4 246,000 180,000 175,000 180,000 180,000 150,000 Project Year 1 Year 2 Year 3 Year 4 Year 5 2$4 24 24 %24 70,000 75,000 48,000 62,000 40,000 35,000 70,000 70,000 70,000 70,000 64,000 63,000 62.000 60,000 82,000 87,000 73,000 62,000 70,000 48,000 62,000 50,000 40,000 82,000 Projects A and E are mutually exclusive. All projects are believed to be of similar risk to the company's existing capital investments. Banden's cost of capital is 12% a year. Required: a. Calculate the expected net present value and the expected profitability index associated with each of the six projects. b. Rank the projects according to both of these investment appraisal methods and give reasoned advice to Banden recommending which projects should be selected. BCDEE 3. A company purchased a machine for $11,000 which has the following costs and resale values over its three year life. Year 1 Year 2 Year 3 Cash flows 2$ 3,000 2$ 2$ Running Costs Resale Value (end of year) 4,000 5,000 8,000 7,000 6,000 The cost of capital of the company is 9%. You are required to assess how frequently the asset should be replaced. 5. HZ Co is appraising an investment project which has an expected life of four. The initial investment, payable at the start of the first year of operation, is $6.4 million. The scrap value is expected to be 15% of the initial investment and it is expected to arise at the end of four years. Forecast sales and production volumes have already been forecast, as follows: Year 1 2 3 4. Sales and production (units) 150,000 200,000 250,000 300,000 The current selling price per unit is $100 and it is expected to be subject to annual inflatioñ of 10% per year. The variable cost per unit is currently at $80 and it is expected to increase by $8 every year. Fixed overheads of $2,500,000 per year in current price terms will arise as a result of undertaking the investment project and for this an inflation of 20% per year is expected. The initial investment will attract tax-allowable depreciation on a reducing balance method at 25% over the four- year project life. The rate of corporation tax is 30% and tax liabilities are paid one year in arrears. HZ Co uses a nominal after-tax discount rate of 10% per year for investment appraisal. Required a. Calculate the expected net present value of the investment project using a nominal (money terms) approach and comment on its financial acceptability. b. Determine the internal rate of return of this investment project. D. Determine the internal Tate of retum of tiis investnent proje 6. Banden is a highly geared company that wishes to expand its operations. Six possible capital investments have been identified, but the company only has access to a total of $620,000. The projects are not divisible and may not be postponed until a future period. Expected net cash inflows (indluding salvage value) Initial outlay $4 246,000 180,000 175,000 180,000 180,000 150,000 Project Year 1 Year 2 Year 3 Year 4 Year 5 2$4 24 24 %24 70,000 75,000 48,000 62,000 40,000 35,000 70,000 70,000 70,000 70,000 64,000 63,000 62.000 60,000 82,000 87,000 73,000 62,000 70,000 48,000 62,000 50,000 40,000 82,000 Projects A and E are mutually exclusive. All projects are believed to be of similar risk to the company's existing capital investments. Banden's cost of capital is 12% a year. Required: a. Calculate the expected net present value and the expected profitability index associated with each of the six projects. b. Rank the projects according to both of these investment appraisal methods and give reasoned advice to Banden recommending which projects should be selected. BCDEE 3. A company purchased a machine for $11,000 which has the following costs and resale values over its three year life. Year 1 Year 2 Year 3 Cash flows 2$ 3,000 2$ 2$ Running Costs Resale Value (end of year) 4,000 5,000 8,000 7,000 6,000 The cost of capital of the company is 9%. You are required to assess how frequently the asset should be replaced.

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Question No 5 Here as required finding out the Net Present value of the project How the Net Present value is calculated please refer the tables below ... View the full answer