Oranges Ltd is a manufacturer of orange juice. The company is considering purchasing a new juicing...
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Oranges Ltd is a manufacturer of orange juice. The company is considering purchasing a new juicing machine that has a limited lifespan. The machine will cost R80m. In the first year of operation, it is expected that there is a 50% chance of the project generating net cash flows of R60m and a 50% chance of it generating net cash flows of R40m. If the machine generated R60m in year 1, there is a 70% chance of it generating R50m in year two and a 30% chance of it generating R40m in year two. If the machine generated R40m in year one, there is a 100% chance of it generating R40m in year two. In any scenario, in the third year, the machine will be scrapped, a process that takes a full year and therefore occurs in year 3. In all cases, there is a 100% chance that the machine will be scrapped for a net R20m in year three. The company has a WACC of 10%. Required: Use a decision tree to determine the expected NPV of the project. Oranges Ltd is a manufacturer of orange juice. The company is considering purchasing a new juicing machine that has a limited lifespan. The machine will cost R80m. In the first year of operation, it is expected that there is a 50% chance of the project generating net cash flows of R60m and a 50% chance of it generating net cash flows of R40m. If the machine generated R60m in year 1, there is a 70% chance of it generating R50m in year two and a 30% chance of it generating R40m in year two. If the machine generated R40m in year one, there is a 100% chance of it generating R40m in year two. In any scenario, in the third year, the machine will be scrapped, a process that takes a full year and therefore occurs in year 3. In all cases, there is a 100% chance that the machine will be scrapped for a net R20m in year three. The company has a WACC of 10%. Required: Use a decision tree to determine the expected NPV of the project.
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Managerial Accounting An Introduction to Concepts Methods and Uses
ISBN: 9780324639766
10th Edition
Authors: Michael W. Maher, Clyde P. Stickney, Roman L. Weil
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