[aviisha]

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

[aviisha]

Thank you for clearing my confusion.

[Author]

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