j (a) (b) Harrybecca plc is currently planning on investing in a new machine which will...
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j (a) (b) Harrybecca plc is currently planning on investing in a new machine which will cost £1.5m to purchase. The machine will be used for 4 years, after which time, it will be sold for scrap for £300,000. Also, an initial one-off investment in working capital of £200,000 will also be required. The machine qualifies for capital allowances on a 25% reducing balance basis. It is expected the new machine will generate new cash sales of £900,000 of per year (at current prices). The expected annual inflation rate of sales price is estimated to be 5%. The associated annual variable costs are estimated to be £275,000 (also at current prices) and have an associated inflation rate of 3%. The fixed costs (in money terms) are estimated as follows: 1 Year Fixed costs £150,000 2 £175,000 3 £185,000 4 £195,000 Harrybecca plc uses a discount rate of 10% in the investment appraisal process and pays corporation tax at 19%, paid one year in arrears. Required: Explain the significance of the reinvestment decision for NPV and IRR. (4 marks) j (a) (b) Harrybecca plc is currently planning on investing in a new machine which will cost £1.5m to purchase. The machine will be used for 4 years, after which time, it will be sold for scrap for £300,000. Also, an initial one-off investment in working capital of £200,000 will also be required. The machine qualifies for capital allowances on a 25% reducing balance basis. It is expected the new machine will generate new cash sales of £900,000 of per year (at current prices). The expected annual inflation rate of sales price is estimated to be 5%. The associated annual variable costs are estimated to be £275,000 (also at current prices) and have an associated inflation rate of 3%. The fixed costs (in money terms) are estimated as follows: 1 Year Fixed costs £150,000 2 £175,000 3 £185,000 4 £195,000 Harrybecca plc uses a discount rate of 10% in the investment appraisal process and pays corporation tax at 19%, paid one year in arrears. Required: Explain the significance of the reinvestment decision for NPV and IRR. (4 marks)
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ANS WER The reinvest ment decision is significant for both NP V and IR R because it ... View the full answer
Related Book For
Fundamental Accounting Principles
ISBN: 978-0078110870
20th Edition
Authors: John J. Wild, Ken W. Shaw, Barbara Chiappetta
Posted Date:
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