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is my answer correct?

lightspeed · 2015-01-13 17:31:18

Just one more NPV related question if anybody can help. I've done what i think is the solution below for the NPV at least. Could anyone who knows how to do the below confirm if im correct with my solution and how i approached this question? A company is considering an acquisition of new production equipment which would…

13-01-2015 6:31pm

#1

lightspeed

Registered Users Posts: 1,272 ✭✭✭

Join Date: October 2009

Posts: 995

Just one more NPV related question if anybody can help. I've done what i think is the solution below for the NPV at least. Could anyone who knows how to do the below confirm if im correct with my solution and how i approached this question?

A company is considering an acquisition of new production equipment which would cost €4 million and have a residual scrap value of €250000 at the end of its 5 year life. Capital allowances can be claimed on this expenditure at a rate of 25% per annum on a reducing balance basis.

Information on the sales and profitability of this equipment is forecast as follows:

Year 1 Year 2 Year 3 Year 4 Year 5
Sales volumes(units) 60000 100000 150000 1 50000 80000
Selling Price €/unit €20.00 €22.00 €24.00 €24.00 €24.00
Variable cost €/unit €8.00 €9.00 €10.00 €11.00 €12.00

The company pays corporation tax at a rate of 12.5%, one year in arrears.

The company's weighted average cost of capital is 8%.

Required: Calculate the payback, discounted payback, net present value and internal rate of return of the proposed investment and indicate whether the company should proceed?

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Purchase cost -€4,000,000
Sales Revenue 1200000 2200000 3600000 3600000 1920000
Variable Costs -480000 -900000 -1500000 -1740000 960000

Contribution 720000 1300000 2100000 1860000 960000
Fixed Costs -120000 -150000 -180000 -190000 -200000

Taxable cash flow 600000 1150000 1920000 1670000 760000

Taxation@12.5% -75000 -144000 -240000 -209000 -95000
Capital allowances 125000 1075000 70313 52734 126953

After tax cash flow 600000 1200000 2851000 1500313 603734 31953
Disposal 250000
Discount factor 8% 1.0 0.926 0.857 0.794 0.735 0.681 0.630
-€4,000,000 555600 1028400 2263694 1102730 581393 20130
Present value of future cash flows €5,551,946.85
Net Present Value €1,551,947

Capital allowances at 25% reducing balance Tax saved TWDV
4000000@25% = €1000000 €1000000@12.5% = €125000 Year 1 €3,000,000.00
€3000000@25% = €750000 €750000@12.5%= €93750 Year 2 €2,250,000.00
€2250000@25%=€562500 €562500@12.5%=€70313 Year 3 €1,687,500.00
€1687599@25%= €421875 €421875@12.5% = €52734 Year 4 €1,265,625.00
€1265625@25% = €316406 + €699219 = €1015625 €1015625@12.5%= €126953 Year 5 €949,219.00

€949219 - €250000 (disposal) = €699219

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