Microlin Ltd intends sot introduce a new product, T, into the...

 

(b)Microlin Ltd intends sot introduce a new product, T, into the market. This will require an 

investment in machinery costing Sh. 2,400,000. The machinery is estimated to have a useful 

life of four years with a terminal value of Sh600,000.

Additional information

1. Capital allowances will be provided on the machinery at a rate of 12.5% per annum 

on a balance basis. At the end of the useful life of the machinery, a balancing charge or 

allowance will arise equal to the difference between the scrap proceeds and the tax 

written down value.

2. Annual profits from the sale of product T will amount to Sh960,000 before deducting 

depreciation on machinery.

3. Corporation tax at a rate of 30% is payable one year after the end of the accounting 

year in which the tax was charged.

4. An investment in working capital amounting to Sh.240,000 will be required on 

commencement of the project. 

This amount will however be recovered on completion of the project.

1. The start of the project coincides with the company's financial year.

2. the cost of capital is 15% per annum

Required:

Using the net present value (NPV) approach, advice the management on the suitability of 

the project. (10 marks)

CRCC Corp. is considering a new project, which requires purchasing a new machine today. The new machine costs $400,000 and will be depreciated straight line over the next four years to a zero salvage value. CRCC estimates they will sell 100,000 units (@$10/unit) of a new product every year. Fixed costs are $300,000 annually. Variable costs are $5/unit. The new lathe will require an initial one-time increase in working capital; mainly spare parts, of $20,000. The working capital will not change throughout the life of the project and will be fully recaptured at the end of the project in 4 years. At the end of the project the machinery will also be sold for $50,000. The tax rate is 34%. What is the NPV if the project has a 6% discount rate?

Dunkin lab plans to purchase a new centrifuge machine for its Arizona facility. The machine costs $567,000 and is expected to have a useful life of 8 ​years, with a terminal disposal value of $54,000. Savings in cash operating costs are expected to be $108,000 per year.​ However, additional working capital is needed to keep the machine running efficiently. The working capital must continually be​ replaced, so an investment of $38,000 needs to be maintained at all​ times, but this investment is fully recoverable​ (will be​ "cashed in") at the end of the useful life. Dunkin Lab's required rate of return is 8​%. Ignore income taxes in your analysis. Assume all cash flows occur at​ year-end except for initial investment amounts. Dunkin Lab uses​ straight-line depreciation for its machines.

1. Your Company is considering an investment project that has the following information: (a) Initial investment (machine one) = $ 15,000,000. (b) The machine one will be depreciated by MACRS 3-year rates. (c) The machine one requires initial net operating working capital of $5,000,000 in year Zero. This amount will increase by $ 2,000,000 in year one and will decrease by $1,000,000 in year two. Accumulated working capital will be fully recovered at the end of year four. (d) The machine One will be dismantled and sold at the end of year four at $ 1,500,000. (e) At the end of year one the company will buy another piece of machine (machine Two) at $ 1,800,000 and will be fully depreciated by the straight line method over two years (year 2 and year 3). The machine Two will be sold at $ 200,000 at the end of year 4. (f) The weighted average cost of capital (WACC) = 18%. (g) Tax rate = 30%. (h) The operating profit (EBIT) of this project is Year EBIT 1 $ 4,000,000 2 6,000,000 3 7,000,000 a. Calculate the Net Present Value, the IRR and the MIRR of this project b. Advise your company to accept or reject this investment.