University work Finance tutorial Could you solve the question and all its 4 parts please.(max 4...

University work

Finance tutorial

Could you solve the question and all its 4 parts please.(max 4 according to chegg). I will give good feedback if it is well and completely answered. Failure to do so will result in negative feedback. The Internal Rate of Return's answer should be around 15% to 16%. Thanks!

X wants to buy a machinery The machine is expected to cost $1 million. Production and sales of product P are forecast to be as follows:

Production and sales(units): Year 1: 35 000 Year 2: 53 000 Year 3: 75 000 Year 4: 36 000

The selling price of product P (in current price terms) will be $20 per unit, while the variable cost of the product (in current price terms) will be $12 per unit. Selling price inflation is expected to be 4% per year and variable cost inflation is expected to be 5% per year. No increase in existing costs is expected since X has spare capacity in both space and labour terms.
Producing and selling product P will call for increased investment in working capital. Analysis of historical levels of working capital within X indicates that at the start of each year, investment in working capital for product P will need to be 7% of sales revenue for that year.
X pays tax of 30% per year in the year in which the taxable profit occurs. Liability to tax is reduced by capital allowance on machinery (tax allowable depreciation), which X can claim on a straight line basis over the four-year life of the proposed investment. The new machine is expected to have no scrap value at the end of the four year period.
X uses a nominal (money terms) after tax cost of capital of 12% for investment appraisal purposes.

Required: (a) Calculate the Net Present Value.

(b) Calculate the Internal Rate of Return.

(c) Discuss the Modigliani-Miller irrelevancy theorem for corporate capital structure and what assumptions underline the theorem.

(d) Discuss the departure from Modigliani-Miller proposition using the agency cost and information asymmetry theory of capital structure and support your answer by empirical evidences.

Expert Solution

Question is too lengthy,have attended only the first part.

jeff jeffy answered 1 year ago

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