Question 2 JCC Foods is a local company that makes instant noodles. Last year, the company…

Question 2
JCC Foods is a local company that makes instant noodles. Last
year, the company spent $98,000 hiring a marketing consultant to
evaluate whether or not a line of phat mama (stir-fried instant
noodles) should be launched. The consultant finds that the new
product will be able to generate $840,000 of additional sales
revenue per year for the company. Production of the new product
will involve the following activities:
_ A new machine has to be purchased prior to commencement of
production. The new machine will cost $2,560,000 and has a useful
life of four years. For tax purposes, assume the new machine would
be fully depreciated by the straight-line method over a period of
four years.
_ If the company accepts this project, the annual cash expenses
of the company will decrease from $3,440,000 to $3,110,000.
_ The project will necessitate an increase in inventory of
$740,000.
_ To purchase the new machine, it appears that the company has
to borrow $2,000,000 at
5% interest from its bank, resulting in additional interest
expenses of $100,000 per year.
In addition, the marginal tax rate and the required rate of
return for the company are 21% and 15% respectively. As a finance
manager of the firm, you are required to evaluate this project.
a. Determine the initial outlay associated with this project.
(10 marks)
b. Calculate the annual after-tax cash flows associated with
this project, for years 1, 2, 3 and 4. (20 marks)
c. Discuss whether you would accept or reject the project if the
required payback period is three years. (10 marks)
d. Would your decision be different if the internal rate of
return rule is employed? (10 marks)
e. What would be your decision if the net present value rule is
used? (10 marks)