July 16, 2020 at 9:30 am #576962lokeshdh00Participant
Q- Cost of machine = 100,000
Annual direct labour cost= 20,000
annual revenue from machine -= 80,000
Annual charge for foreman ( 10% appotionment) = 5000
aanual components required = 18,000
Residual value = 40,000
cost of capital = 20%
sir, why the annual foreman charge was not taken into account. Depriciation is not taken into account because its not really a cash flow but foreman charge is…
July 16, 2020 at 11:32 am #576974lokeshdh00Participant
Also,I know the most dominiant factor is NPV.But which is most dominiant factor in decision criteria among them – IRR or PayBack Period.
July 16, 2020 at 5:29 pm #577012John MoffatKeymaster
The foreman is just a share of his total wage. So his total wage will stay the same whether or not they buy this machine. It is therefore not an extra cash flow and is therefore not relevant.
I don’t understand your second question. All three are ways of making a decision of which NPV is the most important. I discuss the logic for each of the methods in my free lectures.
July 21, 2020 at 6:22 am #577515aviishaParticipant
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 $
? 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.
(a) Calculate the net present value of the project and advise the firm whether the
project should be undertaken.
(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
July 21, 2020 at 7:49 am #577522John MoffatKeymaster
This question could not be asked in Paper MA – inflation and capital allowances are not in the syllabus until Paper PM (and you cannot be asked a full question like this anyway in Paper MA).
It seems that maybe you have been set this question as an assignment (otherwise you would have an answer in the same book in which you found the question). We do not provide answers to homework.
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