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Answer to Question 1 2 5 Answer to Question 4 8 Answer to Question 4 8 Answer to Question 5 8 Answer to Question 4 8 Answer to Question 5 8 Answer to Question 4 8 Answer to Question 5 8 Answer to Ques

   

Added on  2021-06-17

14 Pages3179 Words474 Views
Running head: PLANT PURCHASE, INSTALLATION AND REPLACEMENTPlant purchase, Installation and replacementName of the Student:Name of the University:Authors Note:

PLANT PURCHASE, INSTALLATION AND REPLACEMENT1Table of ContentsAnswer to Question 1......................................................................................................................2a)..................................................................................................................................................3b)..................................................................................................................................................4c)..................................................................................................................................................4Answer to Question 2......................................................................................................................5Answer to Question 3......................................................................................................................71...................................................................................................................................................72...................................................................................................................................................7Answer to Question 4......................................................................................................................8Answer to Question 5......................................................................................................................8Reference.......................................................................................................................................13

PLANT PURCHASE, INSTALLATION AND REPLACEMENT2Answer to Question 1In the process, of capital budgeting decisions to be conducted by the company, the conceptsof present worth, internal rate of return and the annual worth hold special significance:a)Present Worth-It is of utmost importance that the revenue or the cash flow that is going to be accruing inrespect of the company from the project should be discounted using a suitablediscounting rate. The reason behind this is that the cash flows that are expected to arisefrom the project are needed to be adjusted for the fluctuating inflation rate of theeconomy, the return that is expected by the stakeholders in return of the risk undertakenby them and several other factors. Calculation of the present worth of the inflows givesout the real value that is going to accrue in favour of the company at the end of theproject. b)Internal rate of return-The percentage of the real return that is generated by the project in respect of thecompany is demonstrated by the internal rate of return. The internal rate of returngenerated by the project must always be above the cost of capital of the project. The costof capital is termed as the amount that the company will have to pay the investors interms of the interest and the repayment of the amount invested by the third parties (Baumet al., 2017). It might be possible that the net present value of a project is positive but theinternal rate of return for the same is less than the cost of capital of the firm. In such asituation, the company will fail to repay the interest and the principle amount to the thirdparties from whom the company has taken the loan.

PLANT PURCHASE, INSTALLATION AND REPLACEMENT3c)Annual worth-The annual worth represents the amount that is generated by the project annually. Thisinformation is very crucial in respect of the capital budgeting analysis to be conducted by thecompany in respect of the project. This is because of the fact that using this information thecompany will be able to ascertain the number of years it will take to get the entire investmentback from the project in the form of cash flows. a)Annual Worth of different AlternativesParticularABCDSupply units5000500050005000Sales price per unit$3.00$3.00$3.00$3.00Sales (1)$15,000.00$15,000.00$15,000.00$15,000.00Fixed Cost$10,000.00$14,000.00$20,000.00$30,000.00Capital Recovery Factor0.229607380.229607380.229607380.22960738(A/P,I,N) (2)$2,296.07$3,214.50$4,592.15$6,888.22Salvage value$500.00$700.00$1,000.00$1,500.00Sinking Fund factor0.129607380.129607380.129607380.12960738(A/F,I,N) (3)$64.80$90.73$129.61$194.41Annual Labor cost (4)$9,000.00$7,500.00$5,000.00$3,000.00Annual Power and maintenance cost (5)$500.00$800.00$1,000.00$1,500.00Annual Worth (1-2+3-4-5)$3,268.73$3,576.22$4,537.46$3,806.19The Annual worth of alternative C is the highest and Alternative A is the lowest.

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