Reference no: EM132378585
FIN1FOF Fundamentals Of Finance Assignment - La Trobe University, Australia
"You work in the Finance division of the Fremantle Manufacturing Company Ltd. The company is in the process of deciding whether or not to purchase a new plastic injection machine. Your company's Chief Financial Officer has asked you to make a recommendation as to whether or not the company should proceed with the project.
There are two parts to this assisgnment.
Part 1: Calculate the company's Weighted Average Cost of Capital.
Part 2: Estimate the project's incremental free cash flows, calculate the project's NPV, IRR, Payback Period and Profitability Index, and make your recommendation as to whether the project should proceed by ticking the appropropriate boxes. (Use the Excel formula ""=IRR"" to calculate the Internal Rate of Return of the project.)"
Project Information -
"The equipment will cost $680, is expected to have a working life of 4 years, and will be depreciated on a diminishing-value basis to a book value of zero.
The equipment is expected to have a salvage value of $180 at the end of 4 years.
The new equipment will improve efficiency and result in increased revenue of $880 in its first year of operation, but because of reduced efficiency from normal wear and tear, revenue will decrease by 6% (from the previous year's revenue) for each of the remaining 3 years of the equipment's life.
Excluding maintenance, all other costs from operating the equipment will be $280 per year. Maintenance costs will amount to $140 in the equipment's first year of operation, and will then increase by $10 per year for the remaining 3 years of the equipment's life.
The equipment will require additional net working capital of $200. The net working capital will be recovered in full after the equipment is sold at the end of its working life.
The equipment will be installed in a building that is owned by the company, but currently is not being used. If the project does not proceed, this building could be rented out for $200 per year.
A feasibility study has been undertaken into the purchase of the new equipment. The cost of preparing the feasibility study was $500.
The company has sufficient capital to undertake all positive-NPV projects. If the Payback Period method is used to evaluate projects, management's policy is that the maximum acceptable payback period is 3 years, and all cash flows in Year 0 would need to be recovered within 3 years for the project to be acceptable under this method."
Attachment:- Fundamentals Of Finance Assignment File.rar
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