Ant Ltd is a profitable manufacturing company. After evaluation of the budget for the
coming financial year, you were asked as financial manager by the board of directors to
consider the following project for possible expansion of the company's activities.
The details of the project are as follows:
Cost price of Equipment: R500 000
Working capital required@ the beginning of the year R 60 000
Estimated economic life of equipment and project: 4 years
Scrap value at end of life R 75 000
Annual income R650 000
Annual Variable costs R387 000
Annual fixed costs (Including depreciation) R163 000
Additional information
Depreciation is calculated for accounting purposes on the Straight line method at 25 % per
annum, on the cost price of the equipment. Management requires a 15 % after tax return on
all capital investments. The income tax rate is at 40% and a wear and tear allowance,
calculated on the straight line method, is 25% per annum and Ignore Vat.
Assume that all cash flows occur on the last day of the year concerned, except the initial
outlays which occur at the beginning of year 1.The working capital will be recovered in year
4
P.V Factors @ 15%
Year 1 0.8696
Year 2 0.7561
Year 3 0.6575
Year 4 0.5718

Required:
Advise the Board of Directors on what to do by the use of NPV technique in capital budgeting decisions.

Answer rating: 100% (QA)

The net present value NPV of the project is calculated as follows Year 0 Cost of equipmen... View the full answer