Incremental fixed costs of 500000 per year in current price terms would arise

Incremental fixed costs of 500000 per year in current

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Incremental fixed costs of $500,000 per year in current price terms would arise as a result of producing the new product. Fixed cost inflation of 8% per year is expected. The initial investment cost of production equipment for the new product will be $25 million, payable at the start of the first year of operation. Production will cease at the end of four years because the new product is expected to have become obsolete due to new technology. The production equipment would have a scrap value at the end of four years of $125,000 in future value terms. Investment in working capital of $15 million will be required at the start of the first year of operation. Working capital inflation of 6% per year is expected and working capital will be recovered in full at the end of four years. Hebac Co pays corporation tax of 20% per year, with the tax liability being settled in the year in which it arises. The company can claim tax allowable depreciation on a 25% reducing balance basis on the initial investment cost, adjusted in the final year of operation for a balancing allowance or charge. Hebac Co currently has a nominal after-tax weighted average cost of capital (WACC) of 12%. The company uses its current WACC as the discount rate for all investment projects.
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___________________________________________________________________________________________________________________ Page 13 of 13 IPK COLLEGE 1664, JALAN KULIM, 14202 BUKIT MERTAJAM, PENANG TEL : 012-5203212 / 0125113212 / 04-5512588 Subject: Financial Management (DFM1) Prepared by Susan Lim Email : [email protected] REQUIRED Calculate the net present value of the investment project in nominal terms and comment on its financial acceptability.
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