Reference no: EM132536887
Question - Capital Investment Analysis
The management team of OPSM is currently evaluating a proposal to overhaul testing equipment across key stores. Important details concerning this proposal is provided below:
The initial cost of the equipment will be $30 million. This cost will be depreciated using the straight line method over the 10 year life of the upgrade.
Staff will need to be retrained to use the new equipment. This is expected to cost $400,000.
Existing equipment will need to be removed and disposed of at a cost of $500,000.
The new equipment will increase the firm's capacity to offer eye tests. This equipment will also enable the firm to offer the leading eye test accuracy and detail on the market. Collectively, this is expected to increase the firm's revenues by $4.5 million in year 1. This will increase by 3% p.a.
The new equipment is expected to save the firm $400,000 in operating costs p.a.
At the end of years 3, 6 and 9, the new equipment will require a calibration service. Each of these services will cost $80,000.
The firm's tax rate is 30%. The firm requires a 12% required rate of return on all potential investments.
Required - In relation to the above proposal:
1. Calculate the annual after tax cash flows and annual after tax profit.
2. Calculate the payback period.
3. Calculate the net present value.
4. Calculate the internal rate of return.
5. Calculate the accounting rate of return.
6. Provide an overview of the key environmental and social factors that the firm should consider in evaluating the proposal.
7. Based on an assessment of the above and other factors, discuss whether the firm should go ahead with the proposal.
8. Discuss how sensitive your recommendations are to changes in assumptions in regards to the financial impact of the new capital investment. In your discussion, include examples which illustrate how changes to at least two assumptions impact the financial analysis.
Ensure that your answers for the above are discussed and supported by relevant calculations/workings.