A limited company ZEMCO PIc, plans to meet increased demand for its products by buying new machinery
Question:
A limited company ZEMCO PIc, plans to meet increased demand for its products by buying new machinery costing $4.35 million.
The machinery would last for five years, at the end of which it would be replaced. The scrap value of the machinery is expected to be 5% of the initial cost.
Capital allowances would be available on the cost of the machinery on a 20% reducing balance basis, with a balancing allowance or charge claimed in the final year of operation.
This investment will increase production capacity by 10,000 units per year and all of these units are expected to be sold as they are produced.
Relevant financial information in current price terms is as follows:
Selling price $550 per unit with inflation of 4-0% per year Variable cost $150 per unit with inflation of 5-5% per year Incremental fixed costs $1 50,000 per year with inflation of 5-0% In addition to the initial cost of the new machinery, initial investment in working capital of $300,000 will be required (one year prior to the sales). Investment in working capital will be subject to the general rate of inflation, which is expected to be 4-7% per year. Tax is 33% payable in advance. Company's cost of capital is 10%.
Required:
Calculate the NPV of the new project and comment wheath
is financially acceptable?
• Calculate IRR of Zemoo's project
Calculate ROCE using A veraze vestment Formula
