Question

**Question 3 – Capital Investment Analysis**

The management team of Accent Group Limited have received a proposal from the manager of Hype DC. This proposal concerns a major upgrade to Hype DC's stores to improve the customer experience. Key details relating to this proposal include:

- The initial cost will be $22 million. This cost will be depreciated using the straight line method over the 5 year life of the upgrade.
- During year 1, the firm will increase marketing costs by $2.0 million to promote the store upgrades.
- Over the five year life of the project, it is expected that the upgrade will increase the firm's sales by $18 million per year. On average, cost of sales is 45% of revenue.
- The firm will need to higher additional staff over the life of the project to help to deal with the increased sale volume. In year 1, the firm's staffing costs will increase by $1.0 million. These costs will increase by 3.5% p.a.
- The upgrade is expected to increase the firm's energy costs by $500,000 in year 1. This increase will be ongoing across the life of the project and will increase by 6% p.a.
- Upgraded stores will include an old shoe recycling drop off zone. This recylcing program will cost $75,000 in year 1. These costs will increase by 2% p.a.
- At the end of year 3, the firm will spend $1.5 million on a minor refurbishment to the stores.

The firm’s tax rate is 30%. The firm requires a 16% required rate of return on all potential investments.

*Required*

In relation to the above proposal:

- Calculate the annual after tax cash flows and annual after tax profit .
- Calculate the payback period .
- Calculate the net present value .
- Calculate the internal rate of return.
- Calculate the accounting rate of return .

Answer #1

Answer 1

Calculation of annual after tax cash flow and annual after tax profit-

Year |
Increase in sales |
Depreciation |
Increase in marketing cost |
Cost of sales |
Increase in staff cost |
Increase in energy cost |
Recycling program cost |
Refurbishment cost |
Profit before tax |
Tax @30% |
Profit after tax |
Add back depreciation |
Cash flow after tax |
PV factor @16% |
PV of cash flow after tax |

1 | 18000000 | 4400000 | 2000000 | 8100000 | 1000000 | 500000 | 75000 | 1925000 | 577500 | 1347500 | 4400000 | 5747500 | 0.862068966 | 4954741.38 | |

2 | 18000000 | 4400000 | 8100000 | 1035000 | 530000 | 76500 | 3858500 | 1157550 | 2700950 | 4400000 | 7100950 | 0.743162901 | 5277162.60 | ||

3 | 18000000 | 4400000 | 8100000 | 1071225 | 561800 | 78030 | 1500000 | 3788945 | 1136683.5 | 2652261.5 | 4400000 | 7052261.5 | 0.640657674 | 4518085.45 | |

4 | 18000000 | 4400000 | 8100000 | 1108717.88 | 595508 | 79590.6 | 3716183.53 | 1114855.06 | 2601328.47 | 4400000 | 7001328.47 | 0.552291098 | 3866771.39 | ||

5 | 18000000 | 4400000 | 8100000 | 1147523 | 631238.48 | 81182.41 | 3640056.11 | 1092016.83 | 2548039.28 | 4400000 | 6948039.28 | 0.476113015 | 3308051.93 | ||

Total |
11850079.24 |
33850079.24 |
21924812.75 |

Answer 2

Calculation of Payback period-

Year |
Cash flow after tax |
Cumulative cash flow |

1 | 5747500 | 5747500.00 |

2 | 7100950 | 12848450.00 |

3 | 7052261.5 | 19900711.50 |

4 | 7001328.47 |
26902039.97 |

5 | 6948039.28 | 33850079.24 |

Payback period = Year before full recovery + (unrecovered cost at start of year / cash flow during the next year)

= 3 + (2099288 / 7001328.47)

= 3 + 0.30 = 3.30 years

Answer 3

Calculation of Net present value-

NPV = Present value of Net cash flow after tax - Initial investment

= 21924812.75 - 22000000

= $75187.25

Answer 4

Calculation of Internal rate of return-

Year |
0 | 1 | 2 | 3 | 4 | 5 |

Cash flow |
-22000000 | 5747500 | 7100950 | 7052262 | 7001328 | 6948039 |

In excel by using IRR formula we will get 15.86% which is more or less equal to current rate of return.

Answer 5

Calculation of accounting rate of return-

ARR = Average Profit after tax / Initial Investment

= (11850079.24 / 5) / 22000000

= 2370015.85 / 22000000

= 10.77%

You are evaluating a capital project with a Net Investment of
$400,000, which includes an increase in net working capital of
$16,000. The project has a life of 12 years with an expected
salvage value of $3,000. The project will be depreciated via
simplified straight-line depreciation. Revenues are expected to
increase by $90,000 per year and operating expenses by $8,000 per
year. The firm's marginal tax rate is 40 percent and the cost of
capital for this project is 15%....

You are evaluating a capital project with a Net Investment of
$95,000, which includes an increase in net working capital of
$5,000. The project has a life of 9 years with an expected salvage
value of $3,000. The project will be depreciated via simplified
straight-line depreciation. Revenues are expected to increase by
$20,000 per year and operating expenses by $4,000 per year. The
firm's marginal tax rate is 40 percent and the cost of capital for
this project is 8%....

You are evaluating a capital project with a Net Investment of
$800,000, which includes an increase in net working capital of
$8,000. The project has a life of 20 years with an expected salvage
value of $100,000. The project will be depreciated via simplified
straight-line depreciation. Revenues are expected to increase by
$120,000 per year and operating expenses by $14,000 per year. The
firm's marginal tax rate is 40 percent and the cost of capital for
this project is 12%....

You are evaluating a capital project with a Net Investment of
$95,000, which includes an increase in net working capital of
$5,000. The project has a life of 9 years with an expected salvage
value of $3,000. The project will be depreciated via simplified
straight-line depreciation. Revenues are expected to increase by
$20,000 per year and operating expenses by $4,000 per year. The
firm's marginal tax rate is 40 percent and the cost of capital for
this project is 8%....

You are evaluating a capital project with a Net Investment of
$400,000, which includes an increase in net working capital of
$16,000. The project has a life of 12 years with an expected
salvage value of $3,000. The project will be depreciated via
simplified straight-line depreciation. Revenues are expected to
increase by $90,000 per year and operating expenses by $8,000 per
year. The firm's marginal tax rate is 40 percent and the cost of
capital for this project is 15%....

A rm is considering an investment project with the following
information:
Initial capital expenditure $36 million
Annual sales (in units) 2 million units
Selling price per unit $20
Cost per unit $10
Project life 3 years Depreciation Straight line, over the life
of the project
Working capital Initially (Year 0) the project requires an
increase in net working capital of $6 million, but it will be
recovered after the project's life (Year 3).
Tax rate 20%
WACC 15%
(a) What...

Try me corporation is contemplating investing in a project that
will incur an initial investment of $1,000,000. The project has a
useful and depreciable life of 5 years. The firm will depreciate
the investment cost using a straight-line depreciation over its
five-year life. The firm is in 25% marginal tax rate. The project
is expected to produce a cash flow before depreciation and taxes of
$350,000 per year throughout the life of the project. At the end of
the life,...

Gateway Communications is considering a project with an initial
fixed asset cost of $2.46 million which will be depreciated
straight-line to a zero book value over the 10-year life of the
project. At the end of the project the equipment is scrapped. The
project will increase pre-tax revenues to the firm by $725,000 a
year. The tax rate is 35 percent. If the firm requires a 16 percent
rate of return what is the Net Present Value of this project?...

Gateway Communications is considering a project with an initial
fixed asset cost of $2.46 million which will be depreciated
straight-line to a zero book value over the 10-year life of the
project. At the end of the project the equipment is scrapped. The
project will increase pre-tax revenues to the firm by $725,000 a
year. The tax rate is 35 percent. If the firm requires a 16 percent
rate of return what is the Net Present Value of this project?...

A capital investment project has total installed cost of $25
million and a terminal value of $16 million at the end of its
10-year life. The project is expected to generate $5 million in net
cash flows after tax each year. The firm’s marginal tax rate is 40
percent, and its cost of capital is 7 percent. Calculate the
profitability index of this project.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 9 minutes ago

asked 17 minutes ago

asked 34 minutes ago

asked 36 minutes ago

asked 36 minutes ago

asked 54 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago