Reference no: EM133088421

Question - Monica is a senior financial manager of Eclipse Ltd. She is conducting a capital budgeting analysis on a new product. She has already authorised an extensive market research on the marketability of the product that cost $15,000, which she paid yesterday.

The new project is expected to generate yearly revenue of $390,000 for 4 years. The related variable costs are expected to be $100,000 p.a. and Monica estimates the relevant fixed costs would be another $30,000 p.a.

The project will require the company to purchase new equipment at a cost of $500,000. The new equipment will be installed in a building which the company already owns but the building is currently left vacant.

The company will depreciate the equipment by the straight-line method to zero salvage value over the 4 years and Monica believes that they can sell the equipment at the end of 4 years for $20,000.

Eclipse Ltd's required payback is 3 years and the required rate of return is 12% p.a. The relevant tax rate is 30% and tax is paid in the year in which earnings are received.

Required -

Calculate the incremental cash flows of the new project for each year (Y0 to Y4 inclusive).

Calculate the payback period of the project. (Show answer correct to 2 decimal places.)

Calculate the net present value (NPV) of the project. (Show answer correct to 2 decimal places.)

Calculate the present value index of the project. (Show answer correct to 4 decimal places.)

Should Monica accept this project? Why or why not?