BPK Bhd is looking to expand the capacity of an existing factory in its Alpha Division by
Question:
BPK Bhd is looking to expand the capacity of an existing factory in its Alpha Division by 850,000 units per year in order to meet increased demand for one of its products. The expansion will cost $3,200,000. The selling price of the product is $3.10 per unit and variable costs of production are $1.10 per unit, both in current price terms. Selling price inflation of 3% per year and variable cost inflation of 6% per year are expected . Nominal fixed costs of production have been forecast as follows: Year 1 2 3 4 Fixed costs ($) 110,000 205,000 330,000 330,000 BPK Bhd has a nominal after- tax weighted average cost of capital of 10% and pays corporation tax of 20% per year one year in arrears. The company can claim 25% reducing balance tax- allowable depreciation on the full cost of the expansion , which you should assume is paid at the start of the first year of operation. BPK Bhd evaluates all investment projects as though they have a project life of 4 years and assumes zero scrap value at the end of 4 years.
Required:
a) Refer to above case in Alpha Division of BPK Bhd , Calculate the Net Present Value of the investment project and comment on its financial acceptability.
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey