The management of Kelp Inc. is contemplating purchasing a new non-current asset to aid in its production targets. The co

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The Management Of Kelp Inc Is Contemplating Purchasing A New Non Current Asset To Aid In Its Production Targets The Co 1 (49.66 KiB) Viewed 9 times

The management of Kelp Inc. is contemplating purchasing a new non-current asset to aid in its production targets. The cost of the non-current asset is $3,000,000 and it is estimated to have an expected life of four years. Additional investment in working capital of $250,000 will be required at the start of the first year of operation. At the end of four years, the non-current asset will be sold for a scrap value expected to be 5% of the initial purchase cost of the machine. The non-current asset will not be replaced. Production and sales from the new non-current asset are expected to be 75,000 units per year. Each unit can be sold for $80 per unit and will incur variable costs of $55 per unit. Incremental fixed costs arising from the operation of the non-current asset will be $350,000 per year. Kelp Inc. has a required rate of return on debt of 20% and a return on equity of 28%. Currently the assets of the company are funded by 80% debt and 20% equity. The company has a corporation tax rate of 25% and projects are discounted at its WACC. Ignore capital allowances and inflation. Required: (a) Calculate the net present value of investing in the new non-current asset. (20 marks) (b) Calculate the payback period if management invests in the new non-current asset. (2 marks) (c) Calculate the internal rate of return for investing in the new non-current asset. (5 marks) (d) Advise management if the investment in the non-current asset is financially viable based on your calculations above. (3 marks)