An existing company (Widad ltd) decides to invest in new line of product at the beginning of
Question:
An existing company (Widad ltd) decides to invest in new line of product at the beginning of year 2019. The investment consists on an equipment which will cost 90 000 € plus 10 000 € for installation. The equipment will be used for 5 years and depreciated over this period (straight-line method). At the end of the 5th year the equipment can be sold at 25000 €.
Your accountant has prepared the following information:
1. Find the annual depreciation for the asset
2. Explain why a business should take account of the working capital associated with project
3. Specific table with the change of working capital associated with this project
4. Find the initial cash flow (Detail required)
5. Find the operating cash flow in a table format. (detail calculation is required)
6. Find the final cash flow. The line product will be sold and the whole replaced by another project by the end of year 5
7. Find the NPV of the project.
8. What the meaning of the discount rate used by the company?
9. Find the IRR of the project
10. Find the Discounted pay-back period?
11. What would you advise the company about this project?
Expert Answer:
The annual depreciation for the asset can be calculated using the straightline method which is Annual depreciation Cost of asset Residual value Useful life In this case the cost of the asset is 90000 ... View the full answer
Managerial Accounting Creating Value in a Dynamic Business Environment
ISBN: 978-0078110917
9th edition
Authors: Ronald W. Hilton
