(A) A company’s board of directors is considering the introduction of new product which was developed by the company. The research and development costs are estimated to be ₤100,000 on a market research study to assess the potential market for the product. Based on this study it is estimated that the company will be able to sell 12,000 units at a price of ₤24 next year, with the unit sales expanding by an additional 10% a year in subsequent years. The product is expected to be withdrawn from the market after 5 years. The direct costs of production are estimated to be ₤13 a unit. The overheads attributable to the production will amount to ₤15,000 pr annum. Manufacture of the product requires an initial investment in machinery amount to ₤560,000, which will be depreciated on a straight line basis over its useful life of 7 years. It is anticipated that the machinery will have resale value of ₤126,000 at the end of the products working life. The project would also require the use of an existing storage facility that would have been rented out for ₤8,000 per annum if it were not used for the project. The company plans to invest in working capital. It is estimated that debtors and creditors will offset each other, but an investment in stock worth ₤42,000 is required in the beginning of the project and this requirement is expected to grow by 12% in the preceding year. Working capital requirement will no increase further for the rest of the projects life. The company requires a 10% after tax rate of return on such investments and the corporate tax rate is 32%.
(i) Determine the net present value of the proposed investment
(ii) Consider the sensitivity of the NPV to a 10% increase in the price of the product.
2007-12-06
08:57:21
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3 answers
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Anonymous
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Other - Business & Finance