| | | **[THREAD HIDDEN]** # Calculation of NPV and before tax on capital employed
Asked Oct 16, 2008, 02:36 AM
—
| Kimathi company plan to buy a new machine to meet expected demand for new product T. this machine will cost Kshs.250,000 and last for four years, at the end of which time it will be sold for Kshs.5,000. Kimathi company expects demand for product T to be as follows:
Year 1 2 3 4
Demand (units) 35,000 40,000 50,000 25,000
The selling price for product T is expected to be Kshs.12 per unit and the variable cost of production is expected to be Kshs.7.80 per unit. Incremental annual fixed production overheads of Kshs.25,000 per year will be incurred. Selling price and cost are all incurrent price terms.
Selling price of product t: 3% per year
Variable cost of Product: 4% per year
Fixed production overheards: 6%
Additional Information
Kimathi company has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in arrears. It can claim capital allowances on a 25% reducing balance basis. General inflation is expected to be 5% per year.
Kimathi Company has a target return on capital employed of 20%. Depreciation is charged on a straight line basis over the life of an asset.
Required
a. calculate the NPV of buying the new machine and comment on your findings ( Work to the nearest Kshs.1,000)
b. Calculate the before tax return on capital employed (accounting rate of return) based on the average investment and comment on your findings.
c. Discuss the strength and weaknesses of internal rate of return in appraising capital investments. | ##
Check out some similar questions!
Capital Budgeting. Cost of Capital. Cash Flow NPV [ 1 Answers ]
Hi there,
This is really URGENT!! NEEDED BY THURSDAY NOON
I tried to do this myself but just couldn’t find where to start.
Any help would be very much appreciated.
CAPITAL BUDGETING TECHNIQUES. This question is based on a case study in Fundamentals of corporate finance 4ed. Ross,...
Return On Capital Employed [ 2 Answers ]
Operating Profit ----------------------------- 648750
Interest Payable ---------------------------- (55000)
-----------
Profit before Tax --------------------------- 593750
...
Capital Budgeting and opportunity cost of capital [ 1 Answers ]
Wiley Co. is considering an investment of $200,000 in a project with a 5 year economic life. After tax net income from the project has been calculated at $22,00 per year including a deduction for depreciation of $30,000 per year. The residual or salvage value at the end of 5 years is $50,000....
View more questions Search Question Tools | Search this Question | | | ### Add your answer here. |