CMA Part 2 Investment Decission

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Joined: Wed Mar 30, 2016 10:18 am

CMA Part 2 Investment Decission

Postby lavina.bijani » Wed Mar 29, 2017 11:47 am

1) Kell Inc. is analyzing an investment for a new product expected to have annual sales of 100,000 units for the next 5 years and then be discontinued. New equipment will be purchased for $1,200,000 and cost $300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the equipment, which can be sold for $300,000. Additional working capital of $400,000 will be required immediately and needed for the life of the product. The product will sell for $80, with direct labor and material costs of $65 per unit. Annual indirect costs will increase by $500,000. Kell’s effective tax rate is 40%.

In a capital budgeting analysis, what is the expected cash flow at time = 5 (fifth year of operations) that Kell should use to compute the net present value?

This is from Beckers Question Bank, the answer does not take into account the depreciation, can you please help?

2) A firm is thinking on a capital investment with (C0) as net initial investment and C as the net incremental annual cash inflow for a period of N years. The hurdle rate used by the firm to evaluate its project is “r”. SonaliSundaram, Chief Budgeting Officer has calculated the NPV of this project as “V” where V > 0. What maximum %age reduction in annual cash inflow will still make this project acceptable by the firm?

How to solve this kind of question, need guidance please

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