Ican 2023 Strategic Financial Management Question 3

Tinco Limited (TL) is considering an expansion project. The project will involve the acquisition of an automated production machine costing ₦11,000,000 and payable now. The machine is expected to have a disposal value at the end of 5 years, which is equal to 10% of the initial expenditure. The following schedule reflects a recent market survey regarding the estimated annual sales revenue from the expansion project over the Project’s five-year life: Level of demand ₦’000 Probability High 16,000 0.25 Medium 12,000 0.50 Low 8,000 0.25 It is expected that the contribution to sales ratio will be 50%. Additional expenditure on fixed overheads is expected to be ₦1,800,000 per annum. TL incurs a 20% tax rate on corporate profits. Corporate tax is paid one year in arrears. TL’s after-tax nominal (money) discount rate is 15.5% per annum. A uniform inflation rate of 5% per annum will apply to all costs and revenues during the life of the project. All of the values above have been expressed in terms of current prices. You can assume that all cash flows occur at the end of each year and that the initial investment does not qualify for capital allowances.