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ABC steel plant industry plans to manufacture a product. The product needs a special component. The industry has reviewed that the special component can be produced in the plant or bought in. An investment is required to start the production of the component for which two mutually exclusive projects A and B representing different production processes are available. The alternative option is to buy in from another company representing project C. The details of projects A and B are given in Table 3: Using the information from table 3 and Discount Cash Flow criteria, calculate Pay Back Period (PBP), Account Rate of Return (ARR). Net Present Value (NPV) and Internal Rate Return (IRR) for project A & Project B if the industry plans to sale the unit cost of RO 350. Using the annual cost data from table 3, determine which project incurs less cost if the industry considers producing 7.500 units per year. Using the table 3. determine the Break-Even quantity and margin of safety (units and value) If the company sells 8.000 units of new product per year at a price of RO 50 per unit. Table 3 Description Capital (RO) Life (years) Sales Quantity (units per year) Salaries per year (RO) Other fixed costs per year (RO) Wages per year (RO) Cost of materials per year (RO) Other variable costs per year (RO) Scrap value at the end of the year (RO) Cost of capital (%) Project-A 355,000 15 10,000 45,000 40,000 70,000 249,340 35,000 31,040 12 Project-B 453,820 15 12,000 50,000 85,000 80,000 286,980 40,000 44,310 12

ABC steel plant industry plans to manufacture a product. The product needs a special component. The industry has reviewed that the special component can be produced in the plant or bought in. An investment is required to start the production of the component for which two mutually exclusive projects A and B representing different production processes are available. The alternative option is to buy in from another company representing project C. The details of projects A and B are given in Table 3: Using the information from table 3 and Discount Cash Flow criteria, calculate Pay Back Period (PBP), Account Rate of Return (ARR). Net Present Value (NPV) and Internal Rate Return (IRR) for project A & Project B if the industry plans to sale the unit cost of RO 350. Using the annual cost data from table 3, determine which project incurs less cost if the industry considers producing 7.500 units per year. Using the table 3. determine the Break-Even quantity and margin of safety (units and value) If the company sells 8.000 units of new product per year at a price of RO 50 per unit. Table 3 Description Capital (RO) Life (years) Sales Quantity (units per year) Salaries per year (RO) Other fixed costs per year (RO) Wages per year (RO) Cost of materials per year (RO) Other variable costs per year (RO) Scrap value at the end of the year (RO) Cost of capital (%) Project-A 355,000 15 10,000 45,000 40,000 70,000 249,340 35,000 31,040 12 Project-B 453,820 15 12,000 50,000 85,000 80,000 286,980 40,000 44,310 12

Financial Reporting, Financial Statement Analysis and Valuation
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter10: Forecasting Financial Statement
Section: Chapter Questions
Problem 11PC
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Q3. ABC steel plant industry plans to manufacture a product. The product needs a special component. The industry has reviewed that the special component can be produced in the plant or bought in. An investment is required to start the production of the component for which two mutually exclusive projects A and B representing different production processes are available. The alternative option is to buy in from another company representing project C. The details of projects A and B are given in Table 3: (i) Using the information from table 3 and Discount Cash Flow criteria, calculate Pay Back Period (PBP), Account Rate of Return (ARR), Net Present Value (NPV) and Internal Rate Return (IRR) for project A & Project B if the industry plans to sale the unit cost of RO 350. (ii) Using the annual cost data from table 3, determine which project incurs less cost if the industry considers producing 7,500 units per year. (iii) Using the table 3, detemine the Break-Even quantity and margin of safety (units and value) If the company sells 8,000 units of new product per year at a price of RO 50 per unit. Table 3 Description Project-A Project-B Capital (RO) 355,000 453,820 Life (years) 15 15 Sales Quantity (units per year) 10,000 12,000 Salaries per year (RO) 45,000 50,000 Other fixed costs per year (RO) 40,000 85,000 Wages per year (RO) 70,000 80,000 Cost of materials per year (RO) 249,340 286,980 Other variable costs per year (RO) 35,000 40,000 Scrap value at the end of the year (RO) 31,840 44,310 Cost of capital (%) 12 12
Transcribed Image Text:Q3. ABC steel plant industry plans to manufacture a product. The product needs a special component. The industry has reviewed that the special component can be produced in the plant or bought in. An investment is required to start the production of the component for which two mutually exclusive projects A and B representing different production processes are available. The alternative option is to buy in from another company representing project C. The details of projects A and B are given in Table 3: (i) Using the information from table 3 and Discount Cash Flow criteria, calculate Pay Back Period (PBP), Account Rate of Return (ARR), Net Present Value (NPV) and Internal Rate Return (IRR) for project A & Project B if the industry plans to sale the unit cost of RO 350. (ii) Using the annual cost data from table 3, determine which project incurs less cost if the industry considers producing 7,500 units per year. (iii) Using the table 3, detemine the Break-Even quantity and margin of safety (units and value) If the company sells 8,000 units of new product per year at a price of RO 50 per unit. Table 3 Description Project-A Project-B Capital (RO) 355,000 453,820 Life (years) 15 15 Sales Quantity (units per year) 10,000 12,000 Salaries per year (RO) 45,000 50,000 Other fixed costs per year (RO) 40,000 85,000 Wages per year (RO) 70,000 80,000 Cost of materials per year (RO) 249,340 286,980 Other variable costs per year (RO) 35,000 40,000 Scrap value at the end of the year (RO) 31,840 44,310 Cost of capital (%) 12 12
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