Thread: 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

Originally Posted by Axarob

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.

what is the answer to this question?

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!