A company is considering an investment proposal to install new milling controls. The project will cost Kes50,000.
Question:
A company is considering an investment proposal to install new milling controls. The project will cost Kes50,000. The facility has a life expectancy of five years and no salvage value. The company’s tax rate is 40%. The estimated cash flows from the proposed investment proposal are as follows:
Year CF
1 10,000
2 11,000
3 14,000
4 15,000
5 25,000
Compute:
a. Accounting Rate of Return and advise management if the required rate of return is 6 %
b. Traditional Payback period and advise management on the feasibility of the project
c. Discounted payback period at 6% discounting factor
d. Net present value at 6% discounting factor and advise management on the project’s feasibility
e. Net present value at 15% discounting factor and advise management on the project’s feasibility
f. Internal rate of return and explain its significance to the firm
g. Profitability Index at 10% discounting factor
Business Statistics A First Course
ISBN: 978-0321979018
7th edition
Authors: David M. Levine, Kathryn A. Szabat, David F. Stephan