AC 201 ASSIGNMENT 3

PART A Project valuation using Net Present Value - 40 marks, 10 marks for each of the four questions.

Sanjo Equipment has recently bought a new equipment for its business with the sum of $750, 000. The manager expects that the business will use it for five years and sell it for a scrap value of $200,000. If the required rate of interest is 5% and it is expected that the equipment will fetch the company the sum of $200,000 annually while costing $40,000 in annual expenses and assuming there is no working capital. Assume that the tax rate is 30%.

1. What is the Net Present Value of this project?
2. What is the Internal Rate of Return?
3. Should Sanjo buy the equipment or not?
4. What will happen if the required rate changes by 2% ( + and/or -)? (Hint: will the project still be viable if the required rate of return changes?)