Yazici Casting Company will buy the atmosphere-controlled induction furnace to use in the production of metal alloys.
Question:
Yazici Casting Company will buy the atmosphere-controlled induction furnace to use in the production of metal alloys. The purchase cost is 90.000 TL. The cash inflow to be provided by the machine in the first year will be 30.000 TL and it will increase by 15 % for each year and the capital cost will be 25%. Annual repair and maintenance costs are estimated to be 5.000 lira and the scrap value is estimated to be 50.000 lira. Economical life of this machine is 5 years.
a) Should investment be made for this device?
b) Due to inflation, it is requested to revise the project by adding 8% risk premium to this rate. In this case, will this project be accepted again? What is the internal rate of return?
c) If risk factor is applied as 0.1 according to the 25% capital cost, will this project be accepted again?
Fundamental Accounting Principles
ISBN: 978-0077862275
22nd edition
Authors: John Wild, Ken Shaw, Barbara Chiappetta