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A unit of Product T will be sold for GH¢ 12.00 and the variable cost of production is expected to be GH¢ 7.50 per unit. Incremental annual fixed production overheads of GH¢ 25 million per year will be incurred. Selling price and costs are all in current price terms but would increase as follows:

Selling price of Product T: 3% per year

Variable cost of production: 4% per year

Fixed production overheads: 6% per year

*Other information*

Nestle Gh. has a real cost of capital of 6% and pays tax at an annual rate of 30% one year in arrears. It can claim capital allowances on a 25% reducing balance basis. General inflation is expected to be 5% per year.

Nestle Gh. has a target return on capital employed of 20%. Depreciation is charged on a straight-line basis over the life of the asset.

*Required*

a. Calculate the NPV of buying the new machine and comment of your findings (work to the nearest million).

b. Calculate the before – tax return on capital employed (ARR) based on the average investment and comment on your findings.

c. Discuss the strengths and weaknesses of IRR in appraising capital investments.

A unit of Product T will be sold for GH¢ 12.00 and the variable cost of production is expected to be GH¢ 7.50 per unit. Incremental annual fixed production overheads of GH¢ 25 million per year will be incurred. Selling price and costs are all in current price terms but would increase as follows:

Selling price of Product T: 3% per year

Variable cost of production: 4% per year

Fixed production overheads: 6% per year

*Other information*

Nestle Gh. has a real cost of capital of 6% and pays tax at an annual rate of 30% one year in arrears. It can claim capital allowances on a 25% reducing balance basis. General inflation is expected to be 5% per year.

Nestle Gh. has a target return on capital employed of 20%. Depreciation is charged on a straight-line basis over the life of the asset.

*Required*

a. Calculate the NPV of buying the new machine and comment of your findings (work to the nearest million).

b. Calculate the before – tax return on capital employed (ARR) based on the average investment and comment on your findings.

c. Discuss the strengths and weaknesses of IRR in appraising capital investments.

A unit of Product T will be sold for GH¢ 12.00 and the variable cost of production is expected to be GH¢ 7.50 per unit. Incremental annual fixed production overheads of GH¢ 25 million per year will be incurred. Selling price and costs are all in current price terms but would increase as follows:

Selling price of Product T: 3% per year

Variable cost of production: 4% per year

Fixed production overheads: 6% per year

*Other information*

Nestle Gh. has a real cost of capital of 6% and pays tax at an annual rate of 30% one year in arrears. It can claim capital allowances on a 25% reducing balance basis. General inflation is expected to be 5% per year.

Nestle Gh. has a target return on capital employed of 20%. Depreciation is charged on a straight-line basis over the life of the asset.

*Required*

a. Calculate the NPV of buying the new machine and comment of your findings (work to the nearest million).

b. Calculate the before – tax return on capital employed (ARR) based on the average investment and comment on your findings.

c. Discuss the strengths and weaknesses of IRR in appraising capital investments.