ABC Ltd manufactures a range of frozen convenience meals. The company operates production plants globally and partners with thousands of farmers and growers around the world. It packages, stores and transports its own products, and their products are consumed by millions of customers every day. The company, along with its partnering farmers and growers, have been under increasing pressure to adapt to climate change and mitigate environmental impacts. There has been an increase in water usage across the years and some of the growing regions experienced severe drought. Further, changes in social demand have resulted in increased interest on food safety and quality and sustainable packaging. The production manager of ABC Ltd wants funding for a new and more energy-efficient machine. The machine has a purchase price of $2,300,000, an estimated useful life of four years and no residual value. Projected operating data that shows the incremental revenue and costs for the first year is as follows: Sales   1,200,000 Variable costs   400,000 Contribution margin   800,000 Fixed costs        Depreciation 575,000      Other costs 200,000   Total fixed costs   775,000 Net operating income   25,000 Incremental revenue and costs, not including straight-line depreciation, are projected to increase by 10% per annum. The existing equipment can be sold now for $200,000. ABC Ltd requires a rate of return of 7%. Ignore tax implications. Required:     Compute the following for the investment proposal Net present value. Payback period.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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ABC Ltd manufactures a range of frozen convenience meals. The company operates production plants globally and partners with thousands of farmers and growers around the world. It packages, stores and transports its own products, and their products are consumed by millions of customers every day.

The company, along with its partnering farmers and growers, have been under increasing pressure to adapt to climate change and mitigate environmental impacts. There has been an increase in water usage across the years and some of the growing regions experienced severe drought. Further, changes in social demand have resulted in increased interest on food safety and quality and sustainable packaging.

The production manager of ABC Ltd wants funding for a new and more energy-efficient machine. The machine has a purchase price of $2,300,000, an estimated useful life of four years and no residual value. Projected operating data that shows the incremental revenue and costs for the first year is as follows:

Sales

 

1,200,000

Variable costs

 

400,000

Contribution margin

 

800,000

Fixed costs

   

   Depreciation

575,000

 

   Other costs

200,000

 

Total fixed costs

 

775,000

Net operating income

 

25,000

Incremental revenue and costs, not including straight-line depreciation, are projected to increase by 10% per annum. The existing equipment can be sold now for $200,000. ABC Ltd requires a rate of return of 7%. Ignore tax implications.

Required:    

Compute the following for the investment proposal

  1. Net present value.
  2. Payback period.
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