## CMA Part 2 Investment Decission

lavina.bijani
Posts: 1
Joined: Wed Mar 30, 2016 10:18 am

### CMA Part 2 Investment Decission

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?

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