A unit of Product T will be sold for GHe 12.00 and the variable cost of...
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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
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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:
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