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aviisha

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Active 4 years ago
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  • July 21, 2020 at 6:22 am #577515
    mysteryaviisha
    Member
    • Topics: 1
    • Replies: 2
    • ☆

    sir help me with this question please.

    Z Plc is considering a project which will necessitate the acquisition of a new machine
    to neutralize the toxic waste produced by its refining plant. The machine would cost $
    6.4 million and would have an economic life of five years.
    ? The machine will generate pre-tax cash flows of $ 1,500,000 in its first year of
    operation. The cash flows will increase by 10% in subsequent years up to year 5.
    The cost of operating the machine will be 10% of the annual pre-tax cash flows.
    ? Z Plc would additionally charge the project an annual management fee of $
    400,000.
    ? The company had disbursed $ 800,000 on research and development on how to
    neutralize toxic waste.
    ? Capital allowances of 25% per annum on a declining balance basis are available
    for the investment.
    ? Taxation of 30% is payable on operating cash flows one year in arrears.
    It is considered that a discount rate of 20% would reflect the risk of the project
    operating cash flows. The firm intends to finance the new plant by means of a five-
    year fixed interest loan at 11.4% per annum. Scrap value will be zero.

    REQUIRED
    (a) Calculate the net present value of the project and advise the firm whether the
    project should be undertaken.
    (8 marks]

    (b) The Managing Director`s daughter is attending a university degree course in
    Accounting & Finance.
    During a discussion with his daughter the Managing Director was informed that
    the NPV is not an appropriate technique for strategic investment decisions as it
    ignores any future

    December 16, 2016 at 4:36 am #363829
    mysteryaviisha
    Member
    • Topics: 1
    • Replies: 2
    • ☆

    Thank you for clearing my confusion.

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