Homework Help is Here – Start Your Trial Now!
Business
Finance
Delsteph Co introduced a new product, LD to its range last year. The machine used to mould each item is a bottleneck in the production process meaning that a maximum of 7000 units per annum can be manufactured. The LD product has been a huge success in the market place and as a result, all items manufactured are sold. The marketing department has prepared the following demand forecast for future years as a result of feedback from customers. Year 1 Demand (units) 8500 2 Maximum additional output Current selling price Variable operating costs Fixed operating costs 10500 $30000 3 The directors are now considering investing in a second machine that will allow the company to satisfy the excess demand. The following information relating to this investment proposal has now been prepared: Initial investment 7000 units 12000 Page 7 of 10 $90 per unit $40 per unit $20000 per year 4 6000 If production remained at 6000 units, the current selling price would be expected to continue throughout the remainder of the life of the product. However, if production is increased, it is expected that the selling price will fall to $75 per unit for all units sold. Again, this will last for the remainder of the life of the product. No terminal value or machine scrap value is expected at the end of four years, when production of LD is planned to end. For investment appraisal purposes, Delsteph uses a nominal (money) discount rate of 11% per year and a target return on capital employed of 20% per year. Ignore taxation Required (a) Calculate the following values for the investment proposal. (i) Net Present Value; (ii) Internal Rate of Return; (iii) Return on Capital Employed (Accounting Rate of Return) based on initial investment; and (iv) Discounted Payback Period

Delsteph Co introduced a new product, LD to its range last year. The machine used to mould each item is a bottleneck in the production process meaning that a maximum of 7000 units per annum can be manufactured. The LD product has been a huge success in the market place and as a result, all items manufactured are sold. The marketing department has prepared the following demand forecast for future years as a result of feedback from customers. Year 1 Demand (units) 8500 2 Maximum additional output Current selling price Variable operating costs Fixed operating costs 10500 $30000 3 The directors are now considering investing in a second machine that will allow the company to satisfy the excess demand. The following information relating to this investment proposal has now been prepared: Initial investment 7000 units 12000 Page 7 of 10 $90 per unit $40 per unit $20000 per year 4 6000 If production remained at 6000 units, the current selling price would be expected to continue throughout the remainder of the life of the product. However, if production is increased, it is expected that the selling price will fall to $75 per unit for all units sold. Again, this will last for the remainder of the life of the product. No terminal value or machine scrap value is expected at the end of four years, when production of LD is planned to end. For investment appraisal purposes, Delsteph uses a nominal (money) discount rate of 11% per year and a target return on capital employed of 20% per year. Ignore taxation Required (a) Calculate the following values for the investment proposal. (i) Net Present Value; (ii) Internal Rate of Return; (iii) Return on Capital Employed (Accounting Rate of Return) based on initial investment; and (iv) Discounted Payback Period

Essentials Of Investments
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
Section: Chapter Questions
Problem 1PS
See similar textbooks
icon
Related questions
Question
Delsteph Co introduced a new product, LD to its range last year. The machine used to mould each item is a bottleneck in the production process meaning that a maximum of 7000 units per annum can be manufactured. The LD product has been a huge success in the market place and as a result, all items manufactured are sold. The marketing department has prepared the following demand forecast for future years as a result of feedback from customers. Year 1 Demand (units) 8500 2 Maximum additional output Current selling price Variable operating costs Fixed operating costs 10500 $30000 3 The directors are now considering investing in a second machine that will allow the company to satisfy the excess demand. The following information relating to this investment proposal has now been prepared: Initial investment 7000 units 12000 Page 7 of 10 $90 per unit $40 per unit $20000 per year 4 6000 If production remained at 6000 units, the current selling price would be expected to continue throughout the remainder of the life of the product. However, if production is increased, it is expected that the selling price will fall to $75 per unit for all units sold. Again, this will last for the remainder of the life of the product. No terminal value or machine scrap value is expected at the end of four years, when production of LD is planned to end. For investment appraisal purposes, Delsteph uses a nominal (money) discount rate of 11% per year and a target return on capital employed of 20% per year. Ignore taxation Required (a) Calculate the following values for the investment proposal. (i) Net Present Value; (ii) Internal Rate of Return; (iii) Return on Capital Employed (Accounting Rate of Return) based on initial investment; and (iv) Discounted Payback Period
Transcribed Image Text:Delsteph Co introduced a new product, LD to its range last year. The machine used to mould each item is a bottleneck in the production process meaning that a maximum of 7000 units per annum can be manufactured. The LD product has been a huge success in the market place and as a result, all items manufactured are sold. The marketing department has prepared the following demand forecast for future years as a result of feedback from customers. Year 1 Demand (units) 8500 2 Maximum additional output Current selling price Variable operating costs Fixed operating costs 10500 $30000 3 The directors are now considering investing in a second machine that will allow the company to satisfy the excess demand. The following information relating to this investment proposal has now been prepared: Initial investment 7000 units 12000 Page 7 of 10 $90 per unit $40 per unit $20000 per year 4 6000 If production remained at 6000 units, the current selling price would be expected to continue throughout the remainder of the life of the product. However, if production is increased, it is expected that the selling price will fall to $75 per unit for all units sold. Again, this will last for the remainder of the life of the product. No terminal value or machine scrap value is expected at the end of four years, when production of LD is planned to end. For investment appraisal purposes, Delsteph uses a nominal (money) discount rate of 11% per year and a target return on capital employed of 20% per year. Ignore taxation Required (a) Calculate the following values for the investment proposal. (i) Net Present Value; (ii) Internal Rate of Return; (iii) Return on Capital Employed (Accounting Rate of Return) based on initial investment; and (iv) Discounted Payback Period
Expert Solution
steps

Step by step

Solved in 1 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS