Company A is considering an investment in a new production line which will entail an immediate...

Company A is considering an investment in a new production line which will entail an immediate capital
expenditure of €1,200,000, an increase in accounts receivables by €100,000 and a decrease in accounts
payable by €100,000. The production line is going to be depreciated on a straight-line basis over 5 years
with no expected salvage value. The sales and operating expenses of the company are expected to
increase by €600,000 and €100,000 per year respectively, over the 5-year life of the project. The working
capital is going to be recovered at the end of the useful life of the capital project in year 5. If Company
A is in the 20% tax bracket and the cost of capital is 10%.

What is the investment cost?

What are the net cash flows of the project on an annual basis for years 1 to 4?

What is the net cash flow of the project for year 5?

What is the present value of all future net cash flows of the project?

What is the profitability index? (Assume two decimal points and no rounding)

Solutions

Expert Solution

ekkarill92 answered 1 year ago

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