You are employed as the assistant accountant in your company and you are currently working on an
Question:
Your company uses a post-tax cost of capital of 8 per cent to appraise all projects of this type.
Task 1
(a) Calculate the net present value of the proposal to purchase the machine. Ignore the effects of inflation and assume that all cash flows occur at the end of the year.
(b) Calculate the payback period for the investment in the machine.
Task 2
The marketing director has asked you to let her know as soon as you have completed your appraisal of the project. She has asked you to provide her with some explanation of your calculations and of how taxation affects the proposal.
Prepare a memorandum to the marketing director which answers her queries. Your memorandum should contain the following:
(a) Your recommendation concerning the proposal;
(b) An explanation of the meaning of the net present value and the payback period;
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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