Answer to Question #290607 in Other for maliha

Question

King Corporation Limited (KCL), a producer of electricity, is considering to expand its operation by adding 5 generators. The cost of these generators would be Tk. 100 million. The expected life of the generators is 5 years. The addition of these generators will result in cash inflows of Tk. 50 million per year for 5 years. Cash outflows would be 50% of cash inflows. KCL uses straight line method of depreciation and expects no salvage value from the generators at the end their service lives. IDLC, a leading Non-Bank Financial Institution, offered KCL to lease the generators for 5 years. The lease payments to be made at the beginning of each year would be Tk. 24 million. The annualized risk-free rate of return is 7%. Tax rate for both KCL and IDLC is 30%.

a.      Show the cash flows associated with the generators to KCL if it decides to buy them.

Answer 1

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