Explain the financial desirability of burley plc, Financial Management

Assignment Help:

BURLEY PLC

Financial desirability

In a real-terms analysis the real rate of return necessary by shareholders has to be used. This is found as follows

1 nominal rate/1 inflation rate-1 = (1.14/1.055) -1 = 8%

The applicable operating costs per box after removing the allocated overhead are (8.00 + 2.00 + 1.50 + 2.00) = $13.50. The costs of the preliminary research etc are not relevant as they are sunk. The set-up cost has previously been adjusted for tax reliefs but the annual cash flows will be taxed at 33%.

The NPV of the project is given by

NPV($) = [PV of after-tax cash inflows] - [set-up costs]

= 0.15m [20 - 13.50] (1 - 33%) PVIFA8.5 - 2m

= 0.65m (3.993) - 2m

= + 2.6m - 2m

= + 0.6m i.e., + $0.6m

Therefore the project is attractive according to the NPV criterion.

The IRR is merely the discount rate R which generates a zero NPV that is the solution to the expression

NPV = 0 = 0.65m (PVIFAR,5) - 2m

Hence PVIFAR.5 = 2m/0.65 = 3.077

To the nearest 1% IRR = 19%. Ever since this exceeds the required return of 8% in real terms the project is acceptable.


Related Discussions:- Explain the financial desirability of burley plc

Issuing procedure - t-bills, Issuing Procedure Treasury bills are sold ...

Issuing Procedure Treasury bills are sold using the auction procedure. The Treasury entertains both competitive and non-competitive tenders for T-Bills. Government securities f

Explain the advantagesand disadvantages of mbo, Explain the Advantagesand d...

Explain the Advantagesand disadvantages of MBO Advantages of MBO Disadvantages of MBO Sale can be arranged quickly   Manag

What is capital rationing, What is capital rationing? Should a firm practic...

What is capital rationing? Should a firm practice capital rationing? Why? Capital rationing is the practice of putting dollar limits on what will be invested in new capital bud

Explain economic order quantity, Q. Explain Economic Order Quantity? Ec...

Q. Explain Economic Order Quantity? Economic Order Quantity (EOQ):- Economic order quantity (EOQ) is that quantity of material for which each order must be placed. Purchasing l

Walter''s Model, Explain the effect of different dividend policies on the v...

Explain the effect of different dividend policies on the value of share respectively as per the walter model in Case 1: Dividend payout ratio is 50% Case 2: Dividend payout ratio

Case let, Which type of financing is appropriate to each firm

Which type of financing is appropriate to each firm

Question, You deposit $500 today in a savings account that pays 3.5% intere...

You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

Define market value in modigliani miller equation, Define in the Modigliani...

Define in the Modigliani-Miller equation (MM equation), why is the market value of the levered firm greater as compared to the market value of an equivalent unlevered firm? Th

Cash discount, Which one is true 1.the higher the discount rate the lower ...

Which one is true 1.the higher the discount rate the lower the cost of trade credit 2.the higher the discount rate the higher the cost of trade credit 3.cost of trade credit duri

What can financial institution do for surplus economic unit, What can a fin...

What can a financial institution often do for a surplus economic unit that it would have difficulty doing for itself if the surplus economic unit (SEU) were to deal directly with a

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd