4. Chilli Chilli has been developing a product, the Chillalarm, which can be fitted to freezers and chill cabinets in shops and supermarkets and will signal when the performance is becoming erratic. This allows the shops to replace or mend the equipment before there is an expensive failure followed by a period of time in which they are without any freezer at all. Details are as follows: The company has spent £500,000 so far developing the product and a further £100,000 on market research. The research suggests there is a sizable market and the company now needs to decide whether to proceed. It has a cost of capital of 10%. They believe that at a price of £200, they can sell 11,000 in the first year, 12,000 in the second year and 8,000 in a third year before the market is saturated. Each Chillalarm will need bought-in components costing £60 and 2 hours of labour; the labour force is fully occupied and no more overtime can be obtained, so they will be transferred from a less sophisticated product, the Bleeper. Details of the Bleeper are as follows: £ per unit Price 100 Materials (20) Labour (4 hours) (24) Fixed overhead absorbed (33) In addition, four managers, who were about to be made redundant at cost of £30,000 each, will be retained for the three years at an annual salary of £20,000 each and then receive redundancy payments of £35,000 each in three years’ time. Equipment costing £2 million would be purchased and would have a resale value of £200,000 in three years’ time. Calculate the Net Present Value of the proposal and hence advise whether it should proceed. Work to the nearest £1,000 thuoghout.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4. Chilli

Chilli has been developing a product, the Chillalarm, which can be fitted to freezers and chill cabinets in shops and supermarkets and will signal when the performance is becoming erratic. This allows the shops to replace or mend the equipment before there is an expensive failure followed by a period of time in which they are without any freezer at all. Details are as follows:

The company has spent £500,000 so far developing the product and a further £100,000 on market research. The research suggests there is a sizable market and the company now needs to decide whether to proceed. It has a cost of capital of 10%.
They believe that at a price of £200, they can sell 11,000 in the first year, 12,000 in the second year and 8,000 in a third year before the market is saturated.
Each Chillalarm will need bought-in components costing £60 and 2 hours of labour; the labour force is fully occupied and no more overtime can be obtained, so they will be transferred from a less sophisticated product, the Bleeper. Details of the Bleeper are as follows:

	£ per unit
Price	100
Materials	(20)
Labour (4 hours)	(24)
Fixed overhead absorbed	(33)

In addition, four managers, who were about to be made redundant at cost of £30,000 each, will be retained for the three years at an annual salary of £20,000 each and then receive redundancy payments of £35,000 each in three years’ time.
Equipment costing £2 million would be purchased and would have a resale value of £200,000 in three years’ time.

Calculate the Net Present Value of the proposal and hence advise whether it should proceed. Work to the nearest £1,000 thuoghout.

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