Net Present Value

Mamaga Ltd manufactures household utensils in Malawi and is considering investing in a new aluminum smelting and moulding plant. This plant will have a useful life of 5 years but will cost MK400,000 to acquire and install with a residual value of MK20,000. The plant will produce 100,000 units per year. Other estimates are given below: Page 2 of 4 Selling price: MK30 per unit Direct cost: MK20 per unit Fixed cost (including depreciation) is MK160,000 per annum. Marketing and promotion cost not included in the above will be MK20,000 and MK32,000 for years 1 and 2. respectively. Additionally, investment in debtors and stocks will increase in year 1 by MK30,000 and MK40,000, respectively. Creditors will also increase by MK20,000 in year 1. Thus, debtors, stocks, and creditors will be recouped at the end of the machine life. The cost of capital is 18%. Corporate tax is 25% and is paid in the year in which profits are made. Depreciation is tax deductible. Required: Compute the Net Present Value of this project and advise Mamaga Ltd whether the plant should be acquired.