In: Accounting
Singapore Clouds Ltd.’s (Microphone manufacturing and selling company), CFO, Mr. Michael has been asked by CEO, Mr. Ken, to assist with an investment appraisal. They have recently completed a three-year feasibility study on whether, or not, to expand their market offerings and offer specially designed high-quality microphone for customers and invest in capital infrastructure for the production line. The market research indicates no other competitors have ever sold this specially designed product before. It might open a completely new market for Clouds Ltd. In addition, it was revealed that this specially designed high-quality microphone could be sold via (e-trade) on-line trading system.
Clouds Ltd. is considering a proposal to acquire new machineries (which has an expected useful life of 6 years). If the company decides to purchase the new machineries, it will receive $ 74,000 for the existing machines in year 1. The existing machineries had been fully depreciated and the net book value of the assets is zero. The new equipment will be placed in service on 1 January 2021. The details regarding the proposal are as follows:
Required:
a. The Company C is interested in long-term financing or long-term project. Investment decision related to ling-term projects is based on the Net Present Value (NPV). In case of positive NPV project is selected and in case of negative NPV, project is rejected.
b. The NPV of the project is calculated as follows:
Working Note:
c. The NPV of the project is negative. Hence management cannot accept the project.