Question

QUESTION 12

Home Decor Pty Ltd is considering investing in a new machine to assemble its furniture. The machine is estimated to cost $150,000 which can last for 5 years before it becomes unreliable and can be sold for scrap at $12,000. The project is estimated to bring in additional $40,000 net cash inflow annually. Although the company expects there will be an annual growth from year 2 onward, it also estimates the growth will be offset by a 2% annual inflation . The net cash flow in year 5 also includes the scrap value.

The company plans to fund the purchase of the new machine using a bank loan with an interest rate of 13%.

8 points

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a. What is the ARR for this project?

Case sensitive. Type in 20.00 (two decimal places) for 20%.

b. Howlongisthepaybackperiodforthisproject?

Case sensitive. Type in 7.00 (two decimal places) for 7 years.

c. What is the NPV for this project? $

%.

years. . C

ase sensitive. Type in 120,000.00 (two decimal places) for $120,000.00, or -120,000.00 for negative $120,000.00.

d. WhatistheIRRforthisproject? %.

Case sensitive. Type in 20.00 (two decimal places) for 20%.

QUESTION 13

Seoul Ltd’s capital structure is as follows:

Debt 35% Preference Shares 15%

Ordinary Share Capital

Answer 1

a) ARR = Avg net income/ Avg investment

= -1700/40000 = -4.25%

b) Payback period is not available as the company suffers a net loss in this project.

c) NPV = -14,666.53

d) IRR = -29%

Year	Outflows	Inflows	Net
1	-49500	40000	-9500
2	-45600	40000	-5600
3	-41700	40000	-1700
4	-37800	40000	2200
5	-33900	40000	6100
	-41700	40000	-1700
	0.0425
	₹ -14,666.53
	-29%