Assignment One Due Date: 01/06/22 Jopker Co. is a private company based in Kitwe. The company is considering investing in a project that will produce belts to be sold to mining companies. The company plans to replace the old machine, which has a book value of K100,000, with a new machine from South Africa. The old machine has one year of economic life with an expected scrap value of zero. The new equipment has an expected useful life of 5 years with a K120,000 scrap value. Jopker uses the straight-line method of depreciation to depreciate its non-current assets and claims tax allowances at 25% per year reducing balance. Installation costs of K100,000 will also be incurred before the project starts but will be paid for next year when the equipment starts operating. The belts are expected to cost the company K16 each to produce and will be sold for K24 each. It is estimated that the cost per belt will increase by 5% compounded each year, and the selling price will increase by 6% compounded each year. The projected units to be sold are expected to be 100,000 in year 1, 120,000 in year 2, 80,000 in year 3, and 120,000 for each of years 4 and 5. At the beginning of the project, K40,000 of inventory will be required. At the same time, accounts receivable will be K50,000, and accounts payable will be K30,000. These amounts will increase by 5% compounded each year. To sell the projected units, the company will need to advertise, and the advertising costs are estimated at K40,000 in the first year, followed by K45,000 per year thereafter. The company faces a tax rate of 30%. Tax is paid one year in arrears. The cost of capital is expected to remain at 11%. Required: a. Calculate the initial investment outlay of the project (3 Marks) b. Calculate the terminal cash flow for the project (2 marks) c. Lay out the relevant cash flows for the project (15 Marks) d. Calculate the Net Present Value (NPV) for the project and advise on its acceptability (5 Marks)
