a.
Rationale | |||
a | Cost of Plant | -13280000 | |
Net operating working capital | -860000 | ||
Total | -14140000 |
b.
Rationale | ||||
b | Beta | 1.27 | ||
Market Risk premium | 7.10% | |||
Risk Free rate | 5.30% | |||
Required rate | 14.31700% | Required rate = Market risk premium*Beta + Risk Free rate | ||
Add: Increased riskiness | 3% | |||
Rounded off figure | 17.32% |
c.
Rationale | |||
c | Cost of plant | 13280000 | |
Annual Depreciation | 1660000 | Cost of plant / 8, since the machine has an 8 year tax life | |
Depreciation for 5 years | 8300000 | Annual Depreciation * 5 | |
Value of Machine after 5 years | 4980000 | Cost of plan - depreciation for 5 years | |
Scrap value | 1570000 | Given | |
Capital Gain / Loss | -3410000 | Scrap value - Value of machine after 5 years | |
After tax Scrap value | 1570000 | There is no tax charged on capital losses |
d.
Rationale | |||
d | Units produced annually | 13700 | |
Price per unit | 11100 | ||
Variable costs | 10300 | ||
Contribution per unit | 800 | Price-variable cost per unit | |
Total Contribution | 10960000 | Contribution per unit*units produced | |
Fixed costs | 2370000 | ||
Operating cash flow | 8590000 | Total Contributions - Fixed costs |
e. Formula for NPV:
where CF is the operating cash flow for a period
r = cost of capital
n = time period
Rationale | |||
e | NPV | 1,31,41,453.71 | NPV function used in Excel |
IRR | 54% | IRR function used in Excel |
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI). a large, publicly traded firm that is the market share leader in radar detection systems (RDSS). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.1 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDS). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSS). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $5.1 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.1 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.3 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.3 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it...