Jonken co is a private company based in Kitwe. The company is considering investing in a project that will be producing belts to be sold to the mining companies. This will involve the company buying a new piece of equipment, the capital costs of which will be K400 000; there will also be an extra K50 000 of installation costs which can be expensed straight away. This piece of equipment will replace an old machine which has a book value of K50 000 and one year to go before it will have been depreciated to zero. The new equipment will be depreciated straight-line to zero over five years with no salvage value at the end of its life. If the project is undertaken, the old equipment will be sold for K90 000.

Jonken uses a straight-line method of depreciation to depreciate its Non-Current Assets and claims tax allowances at 25% per year reducing the balance.

The belts are expected to cost the company K16 each to take to the market and will be sold for K24 each. It is estimated that the cost per belt will be increasing by 5% compounded each year and the selling price by 6% compounded each year.

The company expects to sell 90 000 units in the first year, rising to 120 000 in year 2, and 80 000 in year 3, before rising back to 120 000 for each of years 4 and 5.

At the beginning of the project, it is expected that there will be K40 000 of inventory required. At the same time accounts receivables will be K50 000 and accounts payable of K25 000. The net working capital will be maintained at 3% of total sales revenue per year until the end of the project.

To sell the projected units, the company will need to advertise and the advertising costs are estimated at K40,000 in the first year and followed by K45,000 per year thereafter.

The company faces a tax rate of 30%. Tax is paid one year in arrears. The cost of capital is expected to remain at 11%.

Required:

a. Calculate the initial investment outlay of the project 

b. Calculate the terminal cash flow for the project.

c.Lay out the relevant cash flows for the project 

d. Calculate the Net Present Value (NPV) for the project and advise on its acceptability

Answer rating: 100% (QA)

Answer a The initial investment outlay for the project is K400000 K50000 K450000 b The terminal cash flow for the project is K120000 x 07 K84000 c The relevant cash flows for the project are as follows Year 0 K450000 Year 1 K16 x 90000 K40000 K40000 x 103 K118000 Year 2 K16 x 120000 K45000 ... View the full answer