The company is considering to invest in a project with following information: - The total investment of the project 2500 monetary unit. Cost of purchasing fixed assets is 2,350monetary unit, the rest of the capital to buy the net assets at the beginning of the second year. The funding for fixed assets in the early first year and the early second year, respectively is 1350 and 1000 monetary unit. - Straight line depreciation within 6 years of the project. When the project is finished, the liquidation assets is 50 monetary unit. - Net working assets are revoked when finished project. - When the project goes into operation period (from the second year), generating a revenue of 3, 500 monetary unit yearly, the variable costs are 500 per year, annual fixed costs excluding depreciation and interest 200 monetary unit - The corporate income tax rate is 25%. The discount rate of the project is 16% per year. The owners are considering to borrow money from banks to finance the project, namely to borrow 60% of the total capital to invest in fixed asset with interest rate of 14% per year within 5 years, interest is paid under the principal balance, principal is paid from having revenue. Requirements: a) Determine the annual cash flow for the project. b) Use IRR to help the company make decision.
The company is considering to invest in a project with following information: - The total investment of the project 2500 monetary unit. Cost of purchasing fixed assets is 2,350monetary unit, the rest of the capital to buy the net assets at the beginning of the second year. The funding for fixed assets in the early first year and the early second year, respectively is 1350 and 1000 monetary unit. - Straight line depreciation within 6 years of the project. When the project is finished, the liquidation assets is 50 monetary unit. - Net working assets are revoked when finished project. - When the project goes into operation period (from the second year), generating a revenue of 3, 500 monetary unit yearly, the variable costs are 500 per year, annual fixed costs excluding depreciation and interest 200 monetary unit - The corporate income tax rate is 25%. The discount rate of the project is 16% per year. The owners are considering to borrow money from banks to finance the project, namely to borrow 60% of the total capital to invest in fixed asset with interest rate of 14% per year within 5 years, interest is paid under the principal balance, principal is paid from having revenue. Requirements: a) Determine the annual cash flow for the project. b) Use IRR to help the company make decision.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 12P
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