ABC Co wants to manufacture a new product, the GY10. A new machine, with a useful life of four years and a maximum output of 1,000,000 units of GY10 per year could be bought for $1,800,000, payable immediately. The scrap value of the machine after four years would be $400,000.Rs 100,000 has been incurred for feasibility. Forecast demand and production of GY10 over the next four years is as follows: Year 1 2 3 4 Demand (units) 800,000 900,000 1,100,000 1200,000 The selling price for GY10 is expected to be $10.00 per unit and the variable cost of materials is $6.00 per unit. Selling price inflation is expected to be 4% per year and material cost inflation is expected to be 2% per year. Other variable costs of production are $1.90 per unit. Fixed costs associated with the machine would be $250,000 in the first year of production, increasing by $100,000 per year in each subsequent year of operation. ABC Co pays tax at an annual rate of 30% in the same year that the profits are earned. ABC Co uses an after-tax weighted average cost of capital of 10% when appraising investment projects. How do you Calculate the net present value of buying the new machine and advise on the acceptability of the proposed purchase? 2. How do you Compare and contrast various tools and techniques available for investment appraisal.
1) ABC Co wants to manufacture a new product, the GY10. A new machine, with a useful life of four years and a maximum output of 1,000,000 units of GY10 per year could be bought for $1,800,000, payable immediately. The scrap value of the machine after four years would be $400,000.Rs 100,000 has been incurred for feasibility.
|
Year |
1 |
2 |
3 |
4 |
|
Demand (units) |
800,000 |
900,000 |
1,100,000 |
1200,000 |
The selling price for GY10 is expected to be $10.00 per unit and the variable cost of materials is $6.00 per unit. Selling price inflation is expected to be 4% per year and material cost inflation is expected to be 2% per year. Other variable costs of production are $1.90 per unit. Fixed costs associated with the machine would be $250,000 in the first year of production, increasing by $100,000 per year in each subsequent year of operation. ABC Co pays tax at an annual rate of 30% in the same year that the profits are earned. ABC Co uses an after-tax weighted average cost of capital of 10% when appraising investment projects.
How do you Calculate the
2. How do you Compare and contrast various tools and techniques available for investment appraisal.
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