Lebbo Ltd is considering investment in a new plant costing $5 million. The plant is expected...

Lebbo Ltd is considering investment in a new plant costing $5 million. The plant is expected to generate sales of $4 million per year for its estimated life of eight years. Sale revenue increases 5% each year. Costs of sales are expected to be 40% of sales. For depreciation purposes the plant will be written down, on a straight line basis, to 20% of its original cost by the end of the project. The company evaluates projects on the basis of after-tax cash flows, and the relevant tax rate is 30%. At the end of the project's life, the plant is expected to have a resale value of $2 million.

While the new machine requires an initial net working capital of $70,000, The current level of net working capital is 50,000. The subsequent net working capital requirement will be 10% of sales revenue.

If the required rate of return is 24%, what is the NPV of this project? Should it be accepted?

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Baraka Ltd. is considering investing in a new processing machine costing a. Sh25 million. The machine...

Baraka Ltd. is considering investing in a new processing machine costing a. Sh25 million. The machine would be used for five years and thereafter be disposed off for Sh. 5 million at the end of the fifth year. The following additional information is available: Additional raw materials amounting to Sh5 million would be required 1. at the beginning of the five-year period. This would increase accounts payable by Sh2 million. These changes in working capital would reverse at the end...

Baraka Ltd. is considering investing in a new processing machine costing a. Sh25 million. The machine...

Baraka Ltd. is considering investing in a new processing machine costing a. Sh25 million. The machine would be used for five years and thereafter be disposed off for Sh. 5 million at the end of the fifth year. The following additional information is available: i. Additional raw materials amounting to Sh5 million would be required 1. at the beginning of the five-year period. This would increase accounts payable by Sh2 million. These changes in working capital would reverse at the...

For a new 5-year project, your company is considering buying new machine costing $1,000,000. The expected...

For a new 5-year project, your company is considering buying new machine costing $1,000,000. The expected salvage of the machine at the end of the project is $80,000. The marketing department has forecasted that the company will be able to sell 120,000 units of new product per year at $15 per unit. The production department has indicated that the variable cost per unit will be $6. The company has forecasted that the incremental fixed costs associated with the project are...

You are considering opening a new plant. The plant will cost $103.9 million up front and...

You are considering opening a new plant. The plant will cost $103.9 million up front and will take one year to build. After that it is expected to produce profits of $30.4 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.5%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable...

You are considering opening a new plant. The plant will cost $97.9 million up front and...

You are considering opening a new plant. The plant will cost $97.9 million up front and will take one year to build. After that it is expected to produce profits of $30.4 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.8%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable...

You are considering opening a new plant. The plant will cost $ 95.5 million up front...

You are considering opening a new plant. The plant will cost $ 95.5 million up front and will take one year to build. After that it is expected to produce profits of $ 28.4 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.5 %. Should you make the? investment? Calculate the IRR and use it to determine the...

You are considering opening a new plant. The plant will cost $ 96.2 million up front...

You are considering opening a new plant. The plant will cost $ 96.2 million up front and will take one year to build. After that it is expected to produce profits of $ 29.6 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.2 % Should you make the investment? Calculate the IRR and use it to determine the...

Starwood Ltd is considering to invest in a new project. Theproject is expected to generate...

Starwood Ltd is considering to invest in a new project. The project is expected to generate cash flows of $1,000 every four years forever with the first cash flow starting in year 2 and $4,000 every four years forever with the first cash flow starting in year 4. Suppose similar investments are paying a return of 10% p.a. compounded quarterly. How much should Starwood Ltd be prepared to pay for this project?

Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected...

Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected to increase pre-tax income(EBITDA) by $7,000 each year for the next 5 years. It costs $25,000 to purchase today and for tax purposes must be depreciated down zero over its 8 year useful life using the straight-line method. If Tank is actually forecasting a salvage (for capital budgeting purposes) of $8,000 after 5 years, what is the machine's net cash flow (after tax) for...

IBX Pty Ltd is considering the purchase of a new machine that is expected to save...

IBX Pty Ltd is considering the purchase of a new machine that is expected to save the company $89,000 at the end of each year in reduced wages. The machine costs $270,000, plus another $14,000 to be installed. It is expected to last for five years after which it can be sold as scrap for $42,000. Operating expenses (such as fuel and maintenance) are $8,000 pa. a)Determine the annual net cash flows of this investment (ignore the effect of taxes)....

Subjects