Equipment Purchase in Companies

Only available on StudyMode
  • Download(s) : 97
  • Published : April 6, 2013
Open Document
Text Preview
Problem 1:

A project of equipment purchase of Mekong Company Ltd. has the estimated data as follows:

The cost of equipment is USD 12,000, the cost for transportation and installation is USD 1,000 USD. The asset is depreciated according to a straight line depreciation scheme within 5 years. It is expected that the project can produce and sell 7,500 units of product at the price of USD 2 per unit, for the first year. The operating costs for the first year (excluding depreciation) are estimated to be USD 10,000. Revenues and operating costs are supposed to grow at the annual rate of 7% and 5% respectively. The pre-tax income from the asset liquidation after 5 years is estimated to be USD 3,000. The project life is 5 years. The cost of capital of the project is 12% per annum. The corporate income tax rate is 28%. In addition, the requirement for incremental net working capital (NWC) of the project is:

|Year |0 |1 |2 |3 |4 |5 | |Incremental NWC |2500 |1200 |2890 |1500 |360 |0 |

Please do the project appraisal with the criteria of NPV and PP.

Problem 2: In 2012, Sunshine Company Ltd considers the possibility of investing in a laptop producing factory with 100% equity. The company hires a project consultancy firm to do the pre-feasibility study with the total fee of USD 50,000.

Sunshine owns a ready plant in the ABC industry zone. The company is currently renting out the plant with USD 115,500 of rental per year. If the company decides to accept the above project, it will stop the rental contract and use this plant for project production.

The cost of machinery purchase is USD 5,700,000. The cost for transportation and installation is USD 10,000. The time of using the machinery is 5 years in total. The machinery is depreciated in accordance with a...
tracking img