Net present value evaluation of proposed investment, Financial Accounting

Assignment Help:

Q. Net present value evaluation of proposed investment?

1599_Net present value evaluation of proposed investment.png

WORKINGS

Fixed costs = 4·50 × 100000 = $450000 per year

Annual writing down allowance = 3000000/10 = $300000

Annual writing down allowance tax benefits = 25% × 300000 = $75000

Ten-year annuity factor at 12% = 5·650

Present value of writing down allowance tax benefits = 75000 × 5·650 = $423750

Year 4 value of year 5 after-tax cash flows in perpetuity = 660000/0·12 = $5500000

Present value of these cash flows = 5500000 × 0·636 = $3498000

From the net present value perspective the proposed investment is acceptable since the net present value (NPV) is large and positive. But a large part of the present value of benefits (63%) derives from the assumption that cash flows will continue indefinitely after Year 4. This is very improbable to occur in practice and excluding these cash flows will result in a negative net present value of approximately $1·2m. In reality the planned investment will not show a positive NPV until more than seven years have passed. Prior to rejecting the proposal steps should be taken to address some of the limitations of the analysis performed.


Related Discussions:- Net present value evaluation of proposed investment

International financial reporting standards and gaap, Alta Velocidad Espera...

Alta Velocidad Esperanza de L'Argentina, Sociedad Anónima (AVE), a high-speed railway operator domiciled in Rio Norte, Argentina, is a Foreign Private Issuer as defined by the U.S.

Adjusting Entry for these Accounting statements?, In June 2012 Company has ...

In June 2012 Company has supplied some goods to a customer on a sale on return basis. The value of the goods was Rs. 120,000. The company recorded this transaction as credit sale,

Explain in detail about the sole proprietorship, Explain in detail about th...

Explain in detail about the Sole proprietorship Sole proprietorship, as the name suggests, is where an individual is the sole owner of a business. This type of business is ofte

Prepare journal entries to record the transactions, On January 1, 2010, And...

On January 1, 2010, Anderson Corporation had 60,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred: Mar. 1 Issued

Dealing with changes in the trust-trusts laws and accounts, Dealing with ch...

Dealing with changes in the trust Profits or losses on disposal of investments should be treated as belonging to that part of the fund out of which they accrued. If not app

Piecemeal realizations and distributions, Piecemeal Realizations and Distri...

Piecemeal Realizations and Distributions Partnership dissolutions may take a substantial number of days even months) so it is unlikely that all cash generated will be simultane

.which of the following is true, 1.Which of the following is true? A. Land ...

1.Which of the following is true? A. Land is depreciated using the straight line depreciation method B. Land is amortized using the declining balance method C. Land is depleted usi

Reasons that influence firm''s degree of transaction exposure, Define reaso...

Define reasons that influence a firm's degree of transaction exposure? What reasons influence a firm's degree of ‘transaction exposure' in a certain currency? For each reason d

Calculate the possible price ranges for stock, Purchase price $2.15 Exer...

Purchase price $2.15 Exercised Price: $37.50 Currently Trading at $37.00 In order to make the decision on the best course of action, two tables of calculations are needed:

Calculation of the actuarial gain and losses, Calculation of the actuarial ...

Calculation of the actuarial gain/losses in year to 31 December 2010 FV of plan assets PV of plan liabilities $000

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