Capital Budgeting Problem - NPV & Tax
Obunkem Manufacturing - a producer of Computer & Accessories is considering setting up a new production plant at its location in Pretoria, South Africa at the cost of $32, 400 million. It is expected to stay economical for 5 years after which the company expects to upgrade to a more efficient technology and sell it for $9, 720 million. The extract from the report prepared by the company's marketing department and engineering departments are as shown in Table below.
|
Year
|
Revenue Inflows (millions)
|
Cash Outflows (millions)
|
|
1
|
29,160
|
16,200
|
|
2
|
27,540
|
14,904
|
|
3
|
25,920
|
12,960
|
|
4
|
22,680
|
11,664
|
|
5
|
19,440
|
12,960
|
If the company still expects to a tax rate of 30% as applicable in the home country to both income and gains, and is not expected to change in 5 years. Tax code requires the company to depreciate the plant over 5 years using SL method with $3, 240 million scrap value. A hurdle rate of 8% is applicable in considering this project. Calculate the NPV of this project with the use of Excel explaining all your procedures. Should Obunkem setup the production plant, why or why not? Why is important to enter formulas accurately in Excel?
Note: Using Excel is necessary to deal with this problem more effectively, and this will assist you in mastering the application of Excel in finance more successfully. Using calculators will be cumbersome and more time consuming and might even prove an expert wrong.