Lungta Company is planning for an unrelated diversification for its business. For this initiation, Chador from...
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Lungta Company is planning for an unrelated diversification for its business. For this initiation, Chador from GCBS has been given charge to execute the long-term investment decision analysis. The cost of new machine will be around Nu. 1 million, additionally lorry charge of Nu. 15,000 and installation charge of Nu 25,000 is applicable to this purchase. The useful life of the machine has been estimated at 5 years. The residual value after 5 years is estimated at Nu. 20,000. The diversification plan will bring into the company, a gross turnover of 1,500 units per year for 5 years at an incremental cost of Nu 150 per units in year 1, excluding the depreciation cost. Each unit sales will be at rate of Nu. 700. There will be inflation impact to both selling price and the cost with 4% increase on annual basis. Additionally, it is also worth noting that Lungta Company's net operating working capital will require a rise of an amount equal to 10% of the sales revenue. The firms tax rate will be similar to that of the prevailing corporate tax set by the Government of Bhutan and the hurdle rate to be used for the time value analysis is worked out as 12%. Questions 1. While calculating the project cash flow, are we supposed to subtract interest expenses or the dividends? 2. Imagine that Lungta Company had spent Nu. 0.5 million in 2022 to refurbish the new diversification site. Should this cost be considered for the analysis? Explain. 3. Assume that Lungta company is opting to lease out it's plant space to another company at Nu. 200,000 p.a. Should this be considered for the analysis? Explain with realistic examples. 4. For instance, the diversification plan is expected to decrease sales of the company's other lines by Nu. 45,000 per year. How will this scenario impact the analysis? 5. Compute the annual sales revenues and costs from the above case study and explain the reasons pertaining to inclusion of inflation in the project cash flows. Lungta Company is planning for an unrelated diversification for its business. For this initiation, Chador from GCBS has been given charge to execute the long-term investment decision analysis. The cost of new machine will be around Nu. 1 million, additionally lorry charge of Nu. 15,000 and installation charge of Nu 25,000 is applicable to this purchase. The useful life of the machine has been estimated at 5 years. The residual value after 5 years is estimated at Nu. 20,000. The diversification plan will bring into the company, a gross turnover of 1,500 units per year for 5 years at an incremental cost of Nu 150 per units in year 1, excluding the depreciation cost. Each unit sales will be at rate of Nu. 700. There will be inflation impact to both selling price and the cost with 4% increase on annual basis. Additionally, it is also worth noting that Lungta Company's net operating working capital will require a rise of an amount equal to 10% of the sales revenue. The firms tax rate will be similar to that of the prevailing corporate tax set by the Government of Bhutan and the hurdle rate to be used for the time value analysis is worked out as 12%. Questions 1. While calculating the project cash flow, are we supposed to subtract interest expenses or the dividends? 2. Imagine that Lungta Company had spent Nu. 0.5 million in 2022 to refurbish the new diversification site. Should this cost be considered for the analysis? Explain. 3. Assume that Lungta company is opting to lease out it's plant space to another company at Nu. 200,000 p.a. Should this be considered for the analysis? Explain with realistic examples. 4. For instance, the diversification plan is expected to decrease sales of the company's other lines by Nu. 45,000 per year. How will this scenario impact the analysis? 5. Compute the annual sales revenues and costs from the above case study and explain the reasons pertaining to inclusion of inflation in the project cash flows.
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Related Book For
Intermediate Accounting
ISBN: 978-0176509736
10th Canadian Edition, Volume 1
Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,
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