Mo Salah, owner of Liverpool Limited, was approached by a local dealer in air conditioning units. The dealer proposed replacing the old cooling system of the company with a modern, more efficient system. The cost of the new system was quoted at R140 000, but it would save R30 000 per year in energy costa. The estimated life of the new system is 10 years, with no salvage value expected. All capital projects are required to earn at least the firms cost of capital at 10%. Required: Calculate the projects Internal Rate of Return (IRR).

Mo Salah, owner of Liverpool Limited, was approached by a local dealer in air conditioning units. The dealer proposed replacing the old cooling system of the company with a modern, more efficient system. The cost of the new system was quoted at R140 000, but it would save R30 000 per year in energy costa. The estimated life of the new system is 10 years, with no salvage value expected. All capital projects are required to earn at least the firms cost of capital at 10%. Required: Calculate the projects Internal Rate of Return (IRR).

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

See similar textbooks

Similar questions

The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a new equipment. Each project will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of the projects are provided below. Required:a) Identify which project should the company accept based on NPV method. b) Identify which project should the company accept based on simple pay back method if the payback criteria is maximum 2 years. c) Which project Giant Machinery should choose if two methods are in conflict.
A firm is considering purchasing equipment that will reduce cost by P400,000. The equipment costs P300,000 and has a salvage value of P50,000 and a life of 7 years. The annual maintenance cost is P6,000. While not in use by the firm, the equipment can be rented to others to generate an income of P10,000 per year. If money can be invested for an 8 per cent return, is the firm justified in buying the equipment?
The ABC Ltd is analysing the costs and benefits of setting up an extra fast-food outlet in Adelaide. The predicted costs and income flows are provided below: $2 million site acquisition and development costs. The capital depreciation expense is $50,000 per year. Investment in plant and equipment of $600,000. The plant and equipment have an estimated useful life of 5 years and the residual value would be zero. The plant and equipment will be depreciated on a straight-line basis for tax purposes. The forecasted sales in year 1 is $600,000 and $800,000 per year thereafter. Labour and material costs are equivalent to 50 per cent of incremental sales. The policy (objective) is to sell the outlet at the end of year 3. The estimated selling price is $3.5 million. Sales in a similar outlet of ABC Ltd will decline by $80,000 per year due to loss of customers and experienced staff to the new venture. Other operating costs are about $150,000 per year (fixed) The net working capital requirement at…
Dune Ltd is considering a project that will require the use of a crane that cost £600,000 when it was acquired four years ago and which has a current carrying amount (statement of financial position value) of £370,000. If the project is not undertaken, the crane could be sold for £180,000 or it could be used for another project. If it is used for the other project, the business will not have to purchase another crane for £250,000. The business uses the net present value (NPV) method to appraise investment projects. What is the relevant cost of the machine when calculating the NPV of the project? O a. £180,000 O b. £370,000 O c. £780,000 O d. £250,000 e. £600,000
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $59,000. The machine would replace an old plece of equipment that costs $15,000 per year to operate. The new machine would cost S7,000 per year to operate. The old machine currently In use could be sold now for a salvage value of $25,000. The new machine would have a useful life of 10 years with no salvage value. Requlred: 1. What Is the annual depreclation expense associated with the new bottling machine? 2. What Is the annual Incremental net operating Income provided by the new bottling machine? 3. What is the amount of the Initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place I.e. 0.123 should be consldered as 12.3%.) 1. Depreciation expense 2. Incremental net operating income Initial investment 4. Simple rate of return %
Salvage Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost P500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Salvage Co's cost of capital is 12 percent, and its marginal tax rate is 40 percent. If the ship produces equal annual labor cost savings over its 10-year life, how much is the annual cash inflow of the project should IRR be the same as the cost of capital?
Salvage Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost P500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Salvage Co's cost of capital is 12 percent, and its marginal tax rate is 40 percent. The ship produces equal annual labor cost savings over its 10-year life. What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest peso.) O P200,000 O P113,004 O P169,506 O P282,510
Neptune company plans to purchase a new machine for the expansion project. The machine’s price is RM200,000 and it would cost another RM20,000 for installation and RM 15,000 for net working capital. The company is planning to finance the machine’s cost through bank loan with an interest rate of 8% per year. The machine has an expected life of 10 years and will be depreciated using simplified straight line depreciation method. However, the project is expected to be ended in year seven. The company expect that this new machine would increase the company’s annual income of RM40,000 per year. The maintenance cost for the machine will be RM10,000 per year. Additionally, the use of this new machine is expected to reduce the defect cost by RM2,000 per year. At the end of year 7, this machine is expected to be sold at RM30,000. Assuming the tax rate is 28% and the required rate of return is 10%, find whether ABC should proceed with this planning. Justify your answer.
Salvage Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost P500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Salvage Co's cost of capital is 12 percent, and its marginal tax rate is 40 percent. If the ship produces equal annual labor cost savings over its 10-year life, what is the profitability index of the of the project should IRR be equal to the cost of capital?
Manus Company is considering the purchase of a new high-speed machine for its factory. The machine will cost $170,000 and will save the company $42,000 per year in cash operating costs. The machine has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 11%. Required: 1) Compute the net present value of this investment. 2) Using net present value as the only decision tool, is this an acceptable project? Why or why not?
Master Machine Berhad is considering a four-year project to improve its production efficiency. Buying a new machine press for RM385,000 is estimated to result in RM145,000 in annual pre-tax cost savings. The press is depreciated using straight-line method of 5 years, and it will have a salvage value at the end of the project of RM45,000. The press also requires an initial investment in spare parts inventory of RM20,000, along with an additional RM3,100 in inventory for each succeeding year of the project. If the company’s tax rate is 22 percent and its discount rate is 9 percent, should the company buy and install the machine press?