Mount Elgon Ltd. is considering the launch of a new product. Exel, for which an investment of Sh.6,000,000 in plant and machinery will be required....

      

Mount Elgon Ltd. is considering the launch of a new product. Exel, for which an investment of Sh.6,000,000 in plant and machinery will be required. The production of Exel is expected to last five years after which the plant and machinery would be sold for Sh. 1,500,000.
Additional Information:
1) Exel would be sold at Sh.600 per unit with a variable cost of Sh240 per unit
2) Fixed production costs (excluding depreciation) would amount to Sh.600,000 per annum
3) The Company applies the straight line method of depreciation
4) The cost of capital is 10% per annum
5) The units of Exel expected to be sold per annum for the next five years as shown below
Year: Units expected to be sold
1 : 8,000
2 : 7,000
3 : 7,000
4 : 5,000
5 : 3,000
6) The corporation tax rate is 30%
Required:
i. Calculate the net present value (NPV) of the project and advise the management on the
appropriate course of action.
ii. Calculate the internal rate of return (IRR) of the project and advise the management on the
appropriate course of action.
iii. Outline the main drawbacks of the IRR method of investment.

  

Answers


Kavungya
6.png
7.png
8.png
Kavungya answered the question on April 13, 2022 at 10:57


Next: Distinguish between compounding and discounting of cash flows.
Previous: Explain the advantages of using market value weights over book value weights in computing the weighted average cost of capital.

View More CPA Financial Management Questions and Answers | Return to Questions Index


Exams With Marking Schemes

Related Questions