10.4 C. George (Controls) Ltd manufactures a thermostat that can be used in a range ofkitchen appliances. The manufacturing process is, at present, semi-automated. Theequipment used cost £540,000 and has a carrying amount of £300,000. Demand forthe product has been fairly stable and output has been maintained at 50,000 units a yearin recent years.The following data, based on the current level of output, have been prepared inrespect of the product:Using existing equipmentSelling priceLabourMaterialsOverheads: VariableFixed£Selling priceLabourMaterialsOverheads: VariableFixed(3.30)(3.65)(1.58)(1.60)Operating profitOperating profitAlthough the existing equipment is expected to last for a further four years before it issold for an estimated £40,000, the business has recently been considering purchasingnew equipment that would completely automate much of the production process. Thiswould give rise to production cost savings. The new equipment would cost £670,000 andwould have an expected life of four years, at the end of which it would be sold for anestimated £70,000. If the new equipment is purchased, the old equipment could be soldfor £150,000 immediately.Per unitThe assistant to the business's accountant has prepared a report to help assess theviability of the proposed change, which includes the following data:Using existing equipmentPer unit££12.40(1.20)(3.20)(1.40)(3.30)(10.13)2.27£12.40(9.10)3.30Depreciation charges will increase by £85,000 a year as a result of purchasing the newmachinery; however, other fixed costs are not expected to change.In the report the assistant wrote:The figures shown above that relate to the proposed change are based on the current levelof output and take account of a depreciation charge of £150,000 a year in respect of the newequipment. The effect of purchasing the new equipment will be to increase the operatingprofit to sales revenue ratio from 18.3 per cent to 26.6 per cent. addition, purchase ofthe new equipment will enable us to reduce our inventories level immediately by £130,000.In view of these facts, I recommend purchase of the new equipment.The business has a cost of capital of 12 per cent. Ignore taxation.Required:(a) Prepare a statement of the incremental cash flows arising from the purchase of thenew equipment.(b) Calculate the net present value of the proposed purchase of new equipment.(c) State, with reasons, whether the business should purchase the new equipment.(d) Explain why cash flow projections are used rather than profit projections to assessthe viability of proposed capital expenditure projects.

The cash inflow, or quantity of money, a new initiative, product, investment, or campaign generates…

C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used cost £540,000 and has a carrying amount of £300,000. Demand for the product has been fairly stable and output has been maintained at 50,000 units a year in recent years. The following data, based on the current level of output, have been prepared in respect of the product: Using existing equipment Selling price Labour Materials Overheads: Variable Fixed Operating profit £ (3.30) (3.65) (1.58) (1.60) Per unit £ 12.40 (10.13) 2.27

C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used cost £540,000 and has a carrying amount of £300,000. Demand for the product has been fairly stable and output has been maintained at 50,000 units a year in recent years. The following data, based on the current level of output, have been prepared in respect of the product: Using existing equipment Selling price Labour Materials Overheads: Variable Fixed Operating profit £ (3.30) (3.65) (1.58) (1.60) Per unit £ 12.40 (10.13) 2.27

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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