Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment would require an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10- year life with no scrap value at the end of its life. It has been estimated that the new equipment would increase the company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7% P1,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 per bond with interest payable semi-annually for ten years. The company is subject to 32% income tax. Determine the Cost of Capital (k) Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.
Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment would require an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10- year life with no scrap value at the end of its life. It has been estimated that the new equipment would increase the company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7% P1,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 per bond with interest payable semi-annually for ten years. The company is subject to 32% income tax. Determine the Cost of Capital (k) Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 12P
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 4 images
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning