QUESTION :CAPITAL BUDGETING

The progressive Company has decided to increase its productive capacity to meet an anticipated increase in demand for its products.The extent of the increase in capaacity has still to be determined and a manage ment meeting has been called to decide which of the following two mutually exclusive proposals I & II should be undertaken.On the basis of the information given below,you are required to evaluate the profitability (ignoring taxation) of each proposals on the assumption of cost of capital of 8% and suggest the proposal to be undertaken.

 

                                                      I                 II

 

                                                      ($)               ($)

Building                                              50000             100,000

Plant                                                 200,000           300,000

Installation                                          10000             10000

Working capital                                       50000             50000

Net income before depriciation (note i)         70000             95000

Other relevant income/exp.

Sales promotion (note ii)                             -                 15000

Plant scrap value                               10000             15000

Building disposable value (note iii)                  30000             60000

 

Notes :

i) The investment life is 10 years

ii)An exceptional amount of expenditure on sales promotion $15000 will require in year 2 on proposal II.This has not been taken in calculating income before depriciation.

iii)It is not the intention to dispose of the buildings in ten years time.However,it is company's policy to take notional figure into account for project evaluation purpose.

 

 

Alpha Geek

(8)

Status NEW Posted 25 Apr 2017 09:04 AM My Price 8.00

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file 1493111621-539835_1_SOLUTION-3 1.xls preview (58 words )

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