Isorait Co is a company which installs kitchens and bathrooms to customer specifications. It is planning...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Isorait Co is a company which installs kitchens and bathrooms to customer specifications. It is planning to invest KShs. 4,000,000 in a new facility to convert vans and trucks into motorhomes. Each motorhome will be designed and built according to customer requirements. Isorait Co expects motorhome production and sales in the first four years of operation to be as follows. Year Motor Homes produced and sold 1 2 3 4 250 300 450 450 The selling price for a motorhome depends on the van or truck which is converted, the quality of the units installed and the extent of conversion work required. Isorait Co has undertaken research into likely sales and costs of different kinds of motorhomes which could be selected by customers, as follows;- Motor Home type Probability of Selection Selling Price (KShs/Unit) Conversion Cost(KShs/Unit) Standard Deluxe 45% 35% 30,000 42,000 72,000 23,000 29,000 40,000 Basic 20% Fixed costs of the production facility are expected to depend on the volume of motorhome production as follows:- Production Volume(Unit/Year) Fixed Cost (KShs.'000"/Year) 200-299 300-339 400-499 4,000 5,000 5,500 Isorait Co pays corporation tax of 30 % per year, with the tax liability being settled in the year in which it arises. The company can claim tax allowable depreciation on the cost of the investment on a straight-line basis over ten years. Isorait Co evaluates investment projects using an after-tax discount rate of 11%. i. Calculate the expected net present value of the planned investment for the first four years of operation. (10 Marks) ii. After the fourth year of operation, Isorait Co expects to continue to produce and sell 450 motorhomes per year for the foreseeable future. Calculate the effect on the expected net present value of the planned. investment of continuing to produce and sell motorhomes beyond the first four years and comment on the financial acceptability of the planned investment. (5 Marks) Isorait Co is a company which installs kitchens and bathrooms to customer specifications. It is planning to invest KShs. 4,000,000 in a new facility to convert vans and trucks into motorhomes. Each motorhome will be designed and built according to customer requirements. Isorait Co expects motorhome production and sales in the first four years of operation to be as follows. Year Motor Homes produced and sold 1 2 3 4 250 300 450 450 The selling price for a motorhome depends on the van or truck which is converted, the quality of the units installed and the extent of conversion work required. Isorait Co has undertaken research into likely sales and costs of different kinds of motorhomes which could be selected by customers, as follows;- Motor Home type Probability of Selection Selling Price (KShs/Unit) Conversion Cost(KShs/Unit) Standard Deluxe 45% 35% 30,000 42,000 72,000 23,000 29,000 40,000 Basic 20% Fixed costs of the production facility are expected to depend on the volume of motorhome production as follows:- Production Volume(Unit/Year) Fixed Cost (KShs.'000"/Year) 200-299 300-339 400-499 4,000 5,000 5,500 Isorait Co pays corporation tax of 30 % per year, with the tax liability being settled in the year in which it arises. The company can claim tax allowable depreciation on the cost of the investment on a straight-line basis over ten years. Isorait Co evaluates investment projects using an after-tax discount rate of 11%. i. Calculate the expected net present value of the planned investment for the first four years of operation. (10 Marks) ii. After the fourth year of operation, Isorait Co expects to continue to produce and sell 450 motorhomes per year for the foreseeable future. Calculate the effect on the expected net present value of the planned. investment of continuing to produce and sell motorhomes beyond the first four years and comment on the financial acceptability of the planned investment. (5 Marks)
Expert Answer:
Answer rating: 100% (QA)
The detailed answer for the above question is provided below i The expected net present value of the planned investment for the first four years of op... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Sweaters.com is a new company started last year by two recent college graduates. The idea behind the company was simple. They will sell premium logo sweaters for Big Ten colleges with one major,...
-
As societys cost of disposing of trash increases over time, recycling rates should automatically increase as well. Discuss.
-
Discuss the steps in processing business transactions.
-
A Tacoma financial services allocates funds to: stocks, bonds, mutual funds, and cash. For each instrument, rate of return and risk are as shown: Instrument Annual Return Risk Stock 10% Bond 3%...
-
The velocity ratio of first system of pulleys is _____.
-
Value chain and classification of costs, pharmaceutical company Merck, a pharmaceutical company, incurs the following costs. a. Cost of redesigning blister packs to make drug containers more...
-
How many fringes are contained in the central diffraction peak for a double-slit pattern if (a) d=2,00D. (b) d = 4.50D. (c) d = 7.80D. Derive an expression for the intensity in the inter- ference...
-
Consumer Research, owned by Chandler Robertson, is retained by large companies to test consumer reaction to new products. On January 31, 20X1, the firms worksheet showed the following adjustments...
-
She had always wanted to start his own business and felt that the ability to produce the G-52 component at a lower cost might provide this opportunity. UEC's purchasing agent assured She that the...
-
ABC. Inc just paid a dividend of $2.58 per share. The dividends are expected to increase by 1% each year. The required rate of return on the stock is 23%. What is the stock's expected price 9 years...
-
On July 1 , the supplies account balance was $ 1 , 6 6 5 . During July, supplies of $ 3 , 7 9 0 were purchased, and $ 1 , 7 0 4 of supplies were on hand as of July 3 1 . Determine supplies expense...
-
What is the difference between a stock's current market price and its intrinsic value? What is free cash flow? If you were an investor, why might you be more interested in free cash flow than net...
-
A stock is currently priced at $20. We model the possible movement of stock price over the next 3 months using a one-step Binomial tree. This means that u = 1.1618 and d = 0.8607. The riskfree rate...
-
What is the output of the following code segment? total = 0 for count in range(4,2,-1): total+count print(total)
-
Research reports detailing the flu season in Canadian cities during 2016. Examine how this season compared to previous years. What procedures or measures did workplaces and individuals (e.g.,...
-
Repeat the previous problem, but close the positions on September 20. Use the spreadsheet to find the profits for the possible stock prices on September 20. Generate a graph and use it to identify...
-
If there is no external market for the intermediate product what is the optimal transfer price? Why?
-
How do different competitive strategies influence the choice of performance measures?
-
Fit Co. specializes in the manufacture of a small range of hi-tech products for the fitness market. They are currently considering the development of a new type of fitness monitor, which would be the...
-
Obtain the time variation of the lift and propulsive force coefficients and their plots for the airfoil given by Example 8.5. Assume that the profile pitches about quarter chord point. Example 8.5...
-
Write down a numerical solution algorithm for the LU decomposition solution of the pseudo penta diagonal matrix equation given by (A11.4). A11.4 || B C 2 A2 B2 C2 922 An-1 Bn-1 Cn-1 -1 An Bn R R Rn-1...
-
Obtain Eq. 8.66 as a relation between the wake vorticity and the reduced circulation. Eq. 8.66 w(x) = k(Q; cosx-22, sin x) cos ks +k(Q; sin x+Q, cos x) sinks, Q = Q, +Q;i
Study smarter with the SolutionInn App