Ahlul Hair Company is considering purchasing new equipment to develop hair resto

Question

Ahlul Hair Company is considering purchasing new equipment to develop hair restoration product. The product will require some work outdoors and will contaminate as small area of the property. Investment in equipment required Working capital required Annual cash receipts before taxes Annual cash expenses before taxes Cost of restoring the land at the end of the $300,000 $80,000 $200,000 $100,000 $30,000 project The product is likely to remain on the market for only five years. The equipment would be fully depreciated at the end of five years. The equipment will have no value at the end of this time and will be scrapped. Ahlul uses straight-line depreciation for tax purposes. The tax rate is 30% and Ahlul uses a 8% discount rate in investment proposals. The working capital would be released for other uses at the end of the five years. Answer the following questions using Microsoft Excel and submit. Compute the net present value of the equipment and the Internal Rate of Return From a purely financial perspective, is it profitable to invest in this product? Write a brief memo addressing the quantitative and qualitative items related to the investment. Be sure to include all of the stakeholders in the analysis. ·Assume the Federal Reserve becomes alarmed about inflation and uses monetary policy to raises the discount rate to 12%. Recompute the net present value. . From a purely financial perspective, is it profitable to invest in this product if the discount rate is 12%?

Explanation / Answer

Year                       -                         1                       2                       3                       4                       5 NPV IRR Initial Investment        -3,00,000 working Capital            -80,000            80,000 Annual receipt        2,00,000        2,00,000        2,00,000        2,00,000        2,00,000 Annual Expenses       -1,00,000       -1,00,000       -1,00,000       -1,00,000       -1,00,000 Depreciation          -60,000          -60,000          -60,000          -60,000          -60,000 PBT            40,000            40,000            40,000            40,000            40,000 Tax 30%            12,000            12,000            12,000            12,000            12,000 PAT            28,000            28,000            28,000            28,000            28,000 Depreciation            60,000            60,000            60,000            60,000            60,000 OCF            88,000            88,000            88,000            88,000            88,000 FCF        -3,80,000            88,000            88,000            88,000            88,000        1,68,000 Disc rate 8%           1.00000          0.92593          0.85734          0.79383          0.73503          0.68058 Disc. Cash Flow        -3,80,000            81,481            75,446            69,857            64,683        1,14,338    25,805 10.30% Since NPV>0 & IRR>8%, so it is acceptable To The shareholders Abul Hair Company Sub: Project Analysis Gentlemen We have analysed the the prject details attached herewith have positive NPV & IRR than the MARR so in view of that project is acceptale. However we disclaim our responsibiloty as we have considered various quantitative factor like MARR, Annual Receipts & expenses and intial investment as suggested by management in the same manner various qualitative aspect like approval from government, fashion of the product etc need to taken care of. Thanking You For XYZ Consultant ABC Year                       -                         1                       2                       3                       4                       5 NPV IRR Initial Investment        -3,00,000 working Capital            -80,000            80,000 Annual receipt        2,00,000        2,00,000        2,00,000        2,00,000        2,00,000 Annual Expenses       -1,00,000       -1,00,000       -1,00,000       -1,00,000       -1,00,000 Depreciation          -60,000          -60,000          -60,000          -60,000          -60,000 PBT            40,000            40,000            40,000            40,000            40,000 Tax 30%            12,000            12,000            12,000            12,000            12,000 PAT            28,000            28,000            28,000            28,000            28,000 Depreciation            60,000            60,000            60,000            60,000            60,000 OCF            88,000            88,000            88,000            88,000            88,000 FCF        -3,80,000            88,000            88,000            88,000            88,000        1,68,000 Disc rate 12%           1.00000          0.89286          0.79719          0.71178          0.63552          0.56743 Disc. Cash Flow        -3,80,000            78,571            70,153            62,637            55,926            95,328 -17,386 10.30% Since NPV

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