50.1K

Verified Solution

Link Copied!

Q 1(a) [20 Marks] Merchants Ltd has developed a new product and it is now necessary to determine whether or not it is worthwhile investing in the machinery required to manufacture the product. The company has already spent 100,000 to develop the product. The machinery would cost 1,000,000 and will be depreciated for tax purposes on a straight line basis over the five-year life of the project. At the end of the five-year period it is anticipated that the machinery would have a resale value of 150,000. Revenues are estimated at 2,500,000 per annum. The variable cost of producing the product is expected to be 550,000 per annum. There will also be various fixed costs of 150,000. The company's management accounting system will also impose a charge of ten per cent of revenues to cover the company's overhead costs, such as research and development costs. The product can be produced in a facility owned by the company that is currently rented out to another company for 50,000 per annum. The company will have to invest 80,000 in working capital to support the production and sales. Given a tax rate of 30 per cent and a required rate of return of 12 per cent determine the investment's net present value. (set out the calculations in 000's). Q 1(b) [5 Marks] What is Internal rate of return (IRR)? Specify the rule of accepting a project based on IRR

Answer & Explanation Solved by verified expert

See Answer