Reference no: EM133030137
Question - ABC Limited, is a pharmaceutical company located in St Catherine. It is planning to invest in a new capsule producing ultra-tech equipment to enhance operational efficiency. A study done recently by consultants at a cost of $1,200,000, indicated that the company is lagging way behind its competitors.
The equipment is expected to cost $8,000,000 and will incur shipping and installation of $600,000 and $500,000 respectively. Residual value after four is estimated $900,000. The equipment will have to be commissioned before the start of production by the Ministry of Health at a cost of, $450,000 for the cost of commissioning the mixer.
The new ultra-tech equipment is expected to increase revenues by $8,300,000 annually. There will variable operating cost of $2,300,000 per year. The capitalized cost of the equipment is to be financed by 70% equity. The entity's annual growth rate in stock price is on average 6 %. The directors expect to pay dividends of $12.80 per share. The current price of the stock is $160 per share.
ABC Limited's debt is to be borrowed before tax at 10%. The entity has a marginal tax rate of 40% and projects are discounted at the company's Weighted Average Cost of Capital (WACC). All cash inflows are deemed to occur at the end of each period and depreciation is an allowable deduction for income taxes purposes.
Required -
a) Compute the payback period of the project.
b) Compute the company's WACC (weighted average cost of capital).
c) Compute the Net Present Value(NPV) of the project.
d) Compute the Internal Rate of Return (IRR).
e) Compute the Profitability Index (PI).
f) Based on the NPV, IRR and PI advise management on the feasibility of the project.
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