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04-09-2018

Product code: Accounts-AW662

 

Question 1:

The CFO has been given the following information about a possible investment. An initial investment of $200,000 will be required to purchase equipment. The product would cost $60 a unit to manufacture (variable cost) and would sell for $90 a unit. New fixed costs of $64,000 would be incurred annually (this includes $20,000 of depreciation). The equipment would be in a CCA pool at 20%, taxes are 40% and WACC is 10%. The project would require an increase of $10,000 in Working Capital and the equipment would have a $20,000 salvage value. The project has an economic life of 10 years. The project expects to sell 5,000 units a year. Analyze the project using the NPV approach.

Question 2:

A project will have an economic life of 6 years with annual savings of $10,000. The initial capital outflow is $40,000.

What is the IRR? How does it compare to NPV as a screening method? (ignore taxes)

Question 3:

If I can buy Truck A or Truck B, and Truck A will last 3 years while Truck B will last 5 years, what issues do I encounter in making the decision? Discuss.

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A project is accepted if its IRR is greater than the cost of capital whereas in case of NPV a project is selected if it has positive cash flow.

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