The directors of Limalh Co are considering a planned investment project costing RM25 million, payable at the start of the first year of operation. The following information relates to the investment project. Year 1 Year 2 Year 3 Year 4 Sales volume(units/year) 520,000 624,000 717,000 788,000 Selling price (RM per unit) 30 30 30 30 Variable costs (RM per unit) 10 10.20 10.61 10.93 Fixed costs RM per year 700,000 735,000 779,000 841,000 The information above needs adjusting to take account the selling price inflation 4% per year and the variable cost inflation of 3% per year. The fixed costs, which are incremental and related to the investment, are in nominal terms. The year 4 sales volume is expected to continue for the foreseeable future. Limalh Co pays corporation tax of 30% one year in arrears. The company can claim tax-allowance depreciation on a 25% reducing balance basis. The view of the directors of Limalh Co are that all investments projects must be evaluated over four years of operations, with an assumed terminal value at the end of the fourth year of 5% of the initial investment cost. The company’s cost of capital is 12 per cent. Required: a. Calculate the net present value and accounting rate of return of the planned investment project. b. Research has found that the assessment of cash flows requires immense understanding of the investment before it is implemented (Puwanenthiren, 2018). Evaluate this statement.
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The directors of Limalh Co are considering a planned investment project costing RM25 million, payable at the start of the first year of operation. The following information relates to the investment project.
The information above needs adjusting to take account the selling price inflation 4% per year and the variable cost inflation of 3% per year. The fixed costs, which are incremental and related to the investment, are in nominal terms. The year 4 sales volume is expected to continue for the foreseeable future.
Limalh Co pays corporation tax of 30% one year in arrears. The company can claim tax-allowance depreciation on a 25% reducing balance basis. The view of the directors of Limalh Co are that all investments projects must be evaluated over four years of operations, with an assumed terminal value at the end of the fourth year of 5% of the initial investment cost. The company’s cost of capital is 12 per cent.
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Research has found that the assessment of cash flows requires immense understanding of the investment before it is implemented (Puwanenthiren, 2018). Evaluate this statement.
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