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Math Help - Managerial Finance - Investments

  1. #1
    Axarob
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    Managerial Finance - Investments

    Tin Ltd. is a manufacturer of aluminium products. The company is currently investigating two projects for expansion. The two projects are mutually exclusive, that is the company can only undertake one of these and has for your advice in deciding which one to proceed
    with.
    Investment 1
    Increase production at the existing factory.
    Cost of new machinery (life span of 10 years) - $1 850,000
    Additional annual revenue for the 10 year life of the project - $770,000
    Annual fixed cost including depreciation - $555,000
    Annual variable costs $40,000
    Depreciation was charged on a straight line basis

    Investment 2 -Set up a new manufacturing facility
    Initial outlay of the facility - $4,615,390
    Annual profits (for each of the 10 years) $1,046,160
    Annual depreciation on equipment $130,770

    Tin Ltd. cost of capital is currently at 12 percent and the company pays tax at the rate of 35percent.

    a) Advise Tin Ltd. which investment project they should undertake.
    2 hours ago - 3 days left to answer
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  2. #2
    MHF Contributor
    Joined
    Aug 2007
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    USA
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    Quote Originally Posted by Axarob View Post
    Investment 1
    Increase production at the existing factory.
    Cost of new machinery (life span of 10 years) - $1 850,000
    Additional annual revenue for the 10 year life of the project - $770,000
    Annual fixed cost including depreciation - $555,000
    Annual variable costs $40,000
    Depreciation was charged on a straight line basis
    "Cost of new machinery (life span of 10 years) - $1 850,000"
    This is unclear. Is it a single, initial cost or a cost somehow spread over the 10 years?
    "Annual fixed cost including depreciation - $555,000 "
    Kind of an irritating hint. Get the depreciation out of there and track it separately.
    "Annual variable costs $40,000"
    That's just plain silly. You're using a level assumption for "variable" costs?

    You reported no salvage value, so Straight Line Depreciation is trivial.

    $1,850,000/10 = $185,000 = Annual Depreciation
    This makes other fixed annual costs $555,000 - $185,000 = $370,000

    Well, line it all up in a spreadsheet, calculate the taxes, and calculate the present value.

    The other investment if far simpler. Let's see what you get.
    Thanks from dorkask
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  3. #3
    Newbie
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    Re: Managerial Finance - Investments

    what is the answer to this question?
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  4. #4
    MHF Contributor
    Joined
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    Ottawa, Canada
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    Re: Managerial Finance - Investments

    WHY? It's a 2007 thread...

    Anyway, stuff like:
    "Initial outlay of the facility - $4,615,390
    Annual profits (for each of the 10 years) $1,046,160"
    leaves me shaking my head.....
    why not 4,600,000 and 1,000,000 instead?
    After all, it's a 10 year estimate!
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